Community Healthcare Trust Inc Q4 FY2025 Earnings Call

Welcome to Community Healthcare Trust 2025 Fourth Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2025 fourth quarter financial results. It will also discuss progress made in various aspects of its business. Following the remarks, the phone lines will be opened 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 18, 2026 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 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. Please go ahead, sir.

Great. Thanks so much, Nick. Good morning, everybody, and thank you for joining us today for our 2025 fourth quarter conference call. On the call with me today is Bill Monroe, our Chief Financial Officer. Leigh Ann 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 8-K, along with our annual report on Form 10-K. In addition, an updated investor presentation was posted to our website last night. During the fourth quarter, the geriatric behavioral hospital operator, a tenant in six of the company's properties, paid rent of $200,000, consistent with last quarter. 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 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. We continue to maintain frequent productive communication with the buyer's team to advance the closing process. The buyer is finalizing legal and business due diligence. And while the transaction is progressing, we can't provide specific timing or certainty that it will close. We will share more information as we move through the process. As it relates to our core business, we had a busy fourth quarter from an operations perspective and capital recycling perspective and continue to be selective from an acquisition standpoint. Our occupancy increased from 90.1% to 90.6% during the quarter, and our leasing team is very busy with renewals and new leasing activity. Our weighted average lease term increased from 6.7 to 7 years. We have three properties that are undergoing redevelopment or significant renovations with long-term tenants in place when the renovations or redevelopment are complete. We expect the largest of these projects to be completed in the second quarter of 2026, with rent expected to commence in the third quarter after the tenant obtains the appropriate provider license. As previously disclosed, during the fourth quarter, we sold an inpatient rehab facility at an approximate 7.9% cap rate, resulting in a gain on the sale of approximately $11.5 million with net proceeds reinvested through a 1031 like-kind exchange into a new inpatient rehab facility for a purchase price of $28.5 million. We entered into a new lease with a lease expiration in 2040 and an anticipated annual return of approximately 9.3%. I will note an additional benefit of the transaction was the reduction of our largest tenant concentration, further enhancing our overall portfolio diversification. For the year, we acquired three properties with a total of 113,000 square feet for an aggregate purchase price of $64.5 million, which were 100% leased with leases running through 2040 and anticipated annual returns of 9.3% to 9.5%. As it relates to other capital recycling activity, we had two additional dispositions closed in the fourth quarter and one disposition closed in the first quarter, resulting in net proceeds of approximately $7.7 million. We have other properties both in market and under review as part of our capital recycling program. And when appropriate, we would anticipate using a similar 1031 like-kind exchange to accretively reinvest proceeds to fund our pipeline. Also, we have signed definitive purchase and sale agreements for five properties to be acquired after completion and occupancy for an aggregate expected investment of $122.5 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 first quarter with two properties expected to close in the second half of 2026 and the remaining two closing in the second half of 2027. 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 fourth quarter and raised it to $0.4775 per common share. This equates to an annualized dividend of $1.91 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.

Thank you, Dave. I will now provide more details on our fourth-quarter financial performance. I am pleased to report total revenue grew from $29.3 million in the fourth quarter of 2024 to $30.9 million in the fourth quarter of 2025, representing 5.6% annual growth over the same period last year. On a quarter-over-quarter basis, the capital recycling and asset disposition progress in the fourth quarter that Dave discussed led to relatively flat quarterly performance across many line items on our income statement as I will review. The $30.9 million of fourth-quarter total revenue was a slight decrease of $140,000 quarter-over-quarter versus the $31.1 million in the third quarter of 2025, impacted by the capital recycling and asset disposition activity. Moving to expenses. Property operating expense increased by less than $100,000 quarter-over-quarter to $6 million for the fourth quarter of 2025. Total general and administrative expense was $4.8 million in the fourth quarter of 2025, which was nearly flat both quarter-over-quarter from the $4.7 million in the third quarter of 2025 and year-over-year from the $4.8 million in the fourth quarter of 2024. Interest expense decreased slightly by approximately $100,000 quarter-over-quarter to $7 million in the fourth quarter of 2025 due primarily to recent FOMC interest rate cuts and the resulting lower floating rates on our revolving credit facility. Moving to funds from operations. FFO in the fourth quarter of 2025 was $13.3 million, a 4.6% increase year-over-year compared to the $12.7 million of FFO in the fourth quarter of 2024. On a diluted common share basis, FFO increased from $0.48 in the fourth quarter of 2024 to $0.49 in the fourth quarter of 2025, although this was $0.01 less quarter-over-quarter from the $0.50 of FFO in the third quarter of 2025 as a result of the net impacts to revenue and expenses described earlier. Adjusted funds from operations, or AFFO, which adjusts for straight-line rent and stock-based compensation, totaled $14.9 million in the fourth quarter of 2025, a 2.1% increase year-over-year compared to the $14.6 million of AFFO in the fourth quarter of 2024. AFFO on a diluted common share basis was $0.55 in the fourth quarter of 2025, even with the $0.55 of AFFO in the fourth quarter of 2024, although this was $0.01 less quarter-over-quarter from the $0.56 of AFFO in the third quarter of 2025, again, as a result of the net impacts to revenue and expenses described earlier. And finally, while it did not impact FFO or AFFO, we did have net gains on sale of $12.1 million from the capital recycling and asset disposition activity during the fourth quarter of 2025 that increased net income. That concludes our prepared remarks. Nick, we are now ready to begin the question-and-answer session.

The first question will come from Connor Mitchell with Piper Sandler.

I want to focus on the geriatric behavioral hospital operator that finalized the transaction last summer. I understand you may not be able to share too much about the timing or specific details, but I'd like to better understand whether the transaction is intended to occur all at once, or if the new operator could potentially sign leases on a property-by-property basis or even a state-by-state basis instead of all at the same time.

Connor, thanks for the question. Yes, as it relates to the transaction itself, there was not as much progress as we would have hoped been made in the fourth quarter. And I think a lot of that is the buyer had to confirm various liabilities and was dependent on the government to get through some of those issues. I think we're seeing significantly more activity in this first quarter as far as the progress made from a due diligence standpoint and site visits and really working on getting the documentation squared away. What I would say about your question specifically, the buyer is still very interested in all six hospitals and the goal is for this transaction to happen all at one time. And that's our expectation, that's the buyer's expectation. So there would be no plans to have any sort of a staged closing. I think it just makes it more challenging that way and a little bit messier. And so everybody is moving forward with the acquisition of the operations of all six hospitals in the three states. And so there would not be a stage closing based on our expectations or the buyers' expectations.

Okay. I appreciate the color. And then turning towards transactions. The pipeline seems pretty stable compared to prior quarters as well. Just curious kind of how you balance the level of transactions, the timing of closing those transactions along with the time needed to find the right dispositions to fund the acquisitions or if you are considering maybe increasing the debt levels or leverage if there's a scale you have there when you see the optimal acquisitions and the timeline needs to be sped up, so you can't really wait for the offsetting dispositions?

Our goal is to effectively manage the sales and acquisitions just like we did in the fourth quarter, when we sold the inpatient rehab facility. There was a brief gap between that sale and the acquisition of a new facility, which had a minor impact on our financials. However, the process was largely successful. Currently, we are focused on several other acquisitions that we plan to integrate in a similar manner when we expect to close on additional inpatient rehab facilities in the third quarter. We aim to sequence these in a way that allows us to utilize a 1031 like-kind exchange if it's suitable, as we expect to see a significant gain on some assets we plan to sell. It is true that buying and selling real estate can sometimes result in timing discrepancies. It's important to note there may be intervals between sales and acquisitions. Our objective is to maintain leverage at its current level and avoid increasing it over time, although some of this will depend on the timing of sales and closures. We are optimistic that our ongoing capital recycling efforts will enable us to acquire assets without substantially increasing the leverage on our balance sheet.

Okay. I appreciate that as well. And maybe just one more, if I could sneak it in. Can you just give an update on if there's really been any change in what you're seeing for cap rates for either acquisitions or dispositions? I know you gave some color in your opening remarks, but just maybe if there's anything you're seeing in the market right now that's really changing drastically from the recent closed transactions?

The good news is that there is a strong demand for the assets we are looking to manage through our disposition process and capital recycling. We received an indicative 7.9% cap rate on the sale of inpatient rehab, and we expect similar pricing on other dispositions. Therefore, we believe that this capital recycling activity will be beneficial to us and the business. We also see opportunities on the buy side in the 9% to 10% cap rate range, but we are being very selective and do not want to raise stock through the ATM at current price levels. Additionally, as mentioned in the prepared remarks, we have some growth embedded in our 2026 numbers due to a redevelopment project we expect to come online in mid-2026, along with another project anticipated at the end of the year. These projects are essentially like acquisitions for us, and we expect them to provide a positive impact in the second half of the year.

The next question will come from Michael Lewis with Truist.

Dave, last quarter on the call, you said you expected the leased percentage for the portfolio to be up 50 to 100 bps in 4Q, and it was. It was up 50 bps. I was just wondering if you felt compelled to give a little bit of insight into what you might expect for occupancy either over the next quarter or two or for the full year? Do you expect that to continue going up this year?

Thanks for the question, Michael. We've had great leasing activity in the portfolio recently, although we experienced some terminations at the end of last year. Mark and his team have done an excellent job of re-leasing that space. Overall, we believe this will be beneficial for the portfolio. It does take time for new leases to become economically effective, but we are optimistic about the leasing activity. However, I anticipate that our occupancy will likely remain in the low 90s over the next couple of quarters without significant changes, as the impact of new leases stabilizes. We expect to see momentum in the second half of the year, which should lead to an increase in leased occupancy, but for now, it should stay around the same level for the next couple of quarters.

Okay. And then my second question is about the investment pipeline. I remember the days when the annual target was $120 million to $150 million annually. Obviously, with COVID and some changes in the cost of capital, you've been below that in recent years. Is the goal now you have these developments that you'll be taking down? Is that kind of the pipeline? Or if you were going to do $120 million to $150 million annually and you had the cost of capital, is there still that volume of opportunity out there? Or has something changed since the pandemic, and maybe there's not as many opportunities in your neck?

Yes, the opportunity remains, Michael. We're eager and see many promising prospects. We maintain regular contact with our core group of brokers that we've collaborated with over the past decade. Our relationships are strong, and we're observing activity in the 9% to 10% range. I can tell you that if our stock were in a different position and we were operating as we did prior to the last year and a half, we would be pursuing those acquisitions. Historically, as you may remember from your long-term coverage of the company, about half of our business has come from client programmatic efforts, generating around $50 million to $60 million a year. The other half has been derived from brokered business, along with some redevelopment projects. What we've done in response to our stock price over the last couple of years has focused more on supporting our clients. Once the situation changes and our share price reaches a level where we can raise capital in a beneficial way, we would definitely look to enhance our client acquisition with the broker deals we've historically pursued.

Okay. And then lastly for me, the last few years, you've also had a note in the investor presentation about this dialysis term sheet pipeline. I didn't see that disclosure this time. Is that relationship kind of done? Or is that on the back burner and that could still become something programmatic down the line?

It's on the back burner. Most of that company's growth has really been through acquisitions, and real estate hasn't been part of their overall acquisition strategy for a while. They've been focused on their core business since making several acquisitions. So including it now didn't seem logical, as we haven't executed any transactions related to that deal. We still have a strong relationship and four dialysis clinics with the operator, and we'll keep monitoring their acquisition activity. However, I would expect that this remains an opportunistic situation and not a priority or expectation for the near future.

Thank you, Michael. Appreciate the questions.

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

Thanks, everybody. I appreciate everyone joining us, and feel free to reach out if you have any additional questions. Hope everyone has a good day. Thank you.

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