Earnings Call Transcript - CHCT Q1 2025

Operator, Operator

Welcome to the Community Healthcare Trust’s 2025 First Quarter Earnings Release Conference Call. On the call today, the company will discuss its 2025 first 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, April 30, 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 and 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 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.

Dave Dupuy, CEO

Great. Thank you, Alan, and good morning. Thank you for joining us today for our 2025 first 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 quarterly report on Form 10-Q. In addition, an updated investor presentation was posted to our website last night. We had a busy first quarter from an operations perspective and continue to be selective from an acquisition standpoint. Both our occupancy and our weighted average remaining lease term remain flat quarter-over-quarter at 90.9% and 6.7 years, respectively. We continue to see good leasing activity in the portfolio, and our Asset Management team is doing a great job serving our tenants while continuing to focus on property operating costs. 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 complete. One of these projects commenced its lease during the first quarter. Due to healthcare licensure requirements, as well as renovatement built into the lease, we expect this property to contribute NOI during the fourth quarter of 2025. During the first quarter, we acquired a behavioral residential treatment facility consisting of five buildings with a total of approximately 38,000 square feet for a purchase price of approximately $9.7 million and anticipated tenant improvements of $1.4 million. We entered into a new lease with a lease expiration of 2040 and anticipated annual return of 9.5%. This represents a new client relationship for CHCT and we are evaluating other projects to work on with this operator. We also have signed definitive purchase and sale agreements for seven properties to be acquired after completion and occupancy for an aggregate expected investment of $169.5 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 third quarter with the remaining six properties closing throughout 2025, 2026, and 2027. In April, we sold one building in Ohio with a net book value of approximately $400,000 and received net proceeds of approximately $600,000 resulting in a gain on the property sale. As for an update on our geriatric psychiatric hospital operator, which is a tenant in six of our properties representing a total of approximately 79,000 square feet and annual base rent of $3.2 million, we continue to see incremental operating improvements and received rent and interest payments of $165,000 in the first quarter. 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. 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. Going forward, we will evaluate the best uses of our capital all while maintaining modest leverage levels. To wrap up, we declared our dividend for the first quarter and raised it to $0.47 per common share. This equates to an annualized dividend of $1.88 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 first quarter financial performance. I’m pleased to report that total revenue grew from $29.3 million in the first quarter of 2024 to $30.1 million in the first quarter of 2025, representing 2.5% annual growth over the same period last year. When compared to our total revenue in the fourth quarter of 2024, which was also $29.3 million, we achieved 2.7% total revenue growth quarter-over-quarter as a result of incremental revenue from fourth quarter acquisitions made late in the quarter last year, seasonal increases in operating expense reimbursements, and the $165,000 of rent and interest payments received in the first quarter from our geriatric psychiatric hospital operator that Dave mentioned earlier. From an expense perspective, property operating expenses increased by approximately $600,000 quarter-over-quarter to $6.1 million in the first quarter of 2025, primarily as a result of higher seasonal utility and snowplow expenses at several properties in January and February in particular. General and administrative expenses increased by approximately $300,000 quarter-over-quarter to $5.1 million in the first quarter of 2025, primarily as a result of higher non-cash amortization of deferred compensation and our typical first quarter seasonal adjustments due to the timing of annual employee salary increases, employer HSA and 401(k) contributions, and employer tax payments. Interest expense remained flat quarter-over-quarter at $6.4 million in the first quarter of 2025 due to the lower acquisition volumes over the last quarter, as well as two fewer days in the first quarter compared to the fourth quarter. Moving to funds from operations, FFO decreased slightly quarter-over-quarter by $77,000 but remained at $12.7 million in the first quarter of 2025. On a per diluted common share basis, FFO was $0.47 in the first quarter of 2025, down slightly from $0.48 in the fourth quarter of 2024. Adjusted funds from operations or AFFO, which adjusts for straight-line rent and stock-based compensation totaled $14.7 million in the first quarter of 2025, which was approximately $100,000 higher than the fourth quarter of 2024, but on a diluted common share basis remained the same quarter-over-quarter at $0.55. That concludes our prepared remarks. Alan, we are now ready to begin the question-and-answer session.

Operator, Operator

Our first question comes from Connor Mitchell of Piper Sandler. Please go ahead.

Connor Mitchell, Analyst

Hey. Good morning. Thanks for taking my question. I guess first, I appreciate some of the information, Dave, you provided on the geriatric psychiatric hospital operator. Just wondering if there’s any more color you could also provide maybe on the timing of when they might consider the sales that you discussed or maybe it gets to a point where you guys decide that it’s time to fully replace them and release the space. Just any more color on kind of the ongoing process on their side, your considerations with the process and then maybe the timing of any of those options as well?

Dave Dupuy, CEO

Thank you for the question, Connor. As we've mentioned, they are currently engaged in a sale process with potential buyers evaluating the purchase of either all or some of the hospitals. We also have options from a lease standpoint that could enhance the appeal of the acquisition to these buyers. It's challenging to provide a specific timeline for when things will progress in the sales process. However, we believe that by the end of the second quarter or the beginning of the third quarter, we should have a clearer understanding of the status of interested buyers, which will help us determine our next steps.

Connor Mitchell, Analyst

Okay. All right. I appreciate the additional information. And then maybe turning towards the acquisition outlook and capital allocation. It looks like you still have a pretty healthy pipeline, but just a little less activity in the first quarter and maybe not expecting a ton in the near term. Is this kind of a read-through what we’re expected to see for the remainder of the year really into the end of the year or even into the beginning of next year unless the conditions better significantly, maybe the cost of capital, your stock price comes back and you guys can utilize the ATM again, or is this kind of just how you’re looking at it for the near term with the current conditions?

Dave Dupuy, CEO

Sure. To provide more details on our pipeline and expectations, we anticipate closing one inpatient rehab facility in early third quarter and are still aiming to close another one in the fourth quarter. We have a $4 million property under a term sheet that could become a third quarter acquisition if we finalize the purchase agreement. We are evaluating some appealing property acquisitions. However, as you mentioned, we are not enthusiastic about raising equity at current prices, so we will explore other options. We have previously mentioned selective asset sales to assist us, as we want to avoid significantly increasing leverage on the business. Therefore, you can expect us to utilize selected asset sales and some draws on our revolver to finance acquisitions. We will be opportunistic if our share price improves, allowing us to consider raising capital through an ATM, but at current levels, we are not inclined to pursue that. We will focus on capital recycling and revolver draws without increasing leverage significantly.

Connor Mitchell, Analyst

Right. Okay. And then maybe just kind of going along the same line, you’re focused on the depressed stock price, I guess. How do you consider maybe the opportunity to even buy back stock versus looking at the potential to use capital and allocate capital for growth and acquire new property?

Dave Dupuy, CEO

Well, listen, I think that’s certainly something that we have talked about at the Board level and we’ll continue to look at and discuss at the Board level. We do have a pipeline of deals that we are focused on and that we will make sure that we execute on those deals by using some capital recycling. What we don’t want to do is we don’t want to put leverage on our balance sheet to do a share purchase. So look, we’ll be opportunistic, and of course, we and the Board will look at all options and depending on the timing of the selected capital recycling and how those opportunities look, there may be an opportunity for us to do a share buyback, but given our pipeline, I wouldn’t expect that that would be our first choice.

Connor Mitchell, Analyst

Okay. That’s all for me. Thank you very much for all the colors.

Dave Dupuy, CEO

Thanks, Connor.

Operator, Operator

The next question comes from Rob Stevenson of Janney. Please go ahead.

Rob Stevenson, Analyst

Hi. Just for clarification, is the $3.2 million of contractual payments with your troubled psychiatric hospital operator just the rent or is that inclusive of the notes as well?

Dave Dupuy, CEO

That’s just the rent.

Rob Stevenson, Analyst

How much more is the payment on the notes?

Bill Monroe, CFO

The notes would comprise another $2.5 million approximately is kind of the run rate that they were paying before the middle of last year.

Rob Stevenson, Analyst

Okay. So in total, it’s just under a $6 million annual payment is what they contractually owe you?

Dave Dupuy, CEO

Correct.

Rob Stevenson, Analyst

Okay. And then was the $1.4 million of TIs expected to be completed and the rent on the Georgia asset starting? When is that supposed to, what’s the timeframe for that?

Dave Dupuy, CEO

We would expect that to complete and the lease to commence early in the third quarter.

Rob Stevenson, Analyst

Okay. And Bill, the $9.7 million Georgia acquisition listed in the release reflects $9.5 million on Page 13 of the supplemental. What’s the difference there? And are those numbers inclusive of this $1.4 million of TIs or is this really essentially like an $11 million asset?

Bill Monroe, CFO

It’s essentially the latter kind of an $11 million asset by the time you include the TI, which again is being done on an expedited basis.

Rob Stevenson, Analyst

Okay. That’s helpful. And then last one for me, Dave, your predecessor wasn’t very fond of preferred stock but given the question, the previous question about capital, et cetera, how are you guys feeling today and the Board feeling about potentially doing a preferred stock depending on where a deal would wind up pricing to give you a little bit of capital for growth here?

Bill Monroe, CFO

Rob, what I would say is we’re looking at all of the capital options that we have and we will evaluate those. I do agree that our bias in general is to keep the capital structure simple and I think that has always served us well. And look, I think there are some issues with a preferred stock issuance that has its pros and cons, but we will evaluate various capital alternatives. But I would say that it’s not a near consideration for us.

Rob Stevenson, Analyst

Okay. Thanks guys. Appreciate the time this morning.

Dave Dupuy, CEO

Thanks, Rob.

Operator, Operator

The next question comes from Barry Oxford of Colliers. Please go ahead.

Barry Oxford, Analyst

Great. Thanks everyone. I have two questions. The first one is about the geriatric tenant. If this situation drags out, how much patience do you have before deciding they are in default of their lease and you need to take action?

Dave Dupuy, CEO

Well, Barry, the way I would characterize it is when I was talking earlier in the call. We want to see kind of where the buyers come in and we think we’ll have better visibility in terms of those potential opportunities by the end of the second quarter, early third quarter. And once we have a sense of buyer interest and specifics associated with that, I think we’ll be making some decisions. And if there isn’t sufficient buyer interest, then we’re going to look at all the alternatives under our leases and notes. And so, we’ve got patience but it’s not unlimited patience and you should expect that we will be looking at trying to get this resolved sooner rather than later.

Barry Oxford, Analyst

Great. Great. And my next question, when you look at some of your other smaller tenants in the portfolio, are you concerned about any tenants? Did any problems kind of arise in the first quarter with some of the smaller tenants or is everybody kind of continuing to pay and continuing to have strong cash flows? And then how would you, from the macro side, describe the environment as far as your tenants’ ability to make money and pay rents going forward?

Dave Dupuy, CEO

We are actively monitoring our tenants and have a watch list in place. Some tenants come on and off that list, but so far this quarter, we've observed relative stability in our portfolio. This is a positive sign as both small and large tenants appear to be doing well. From a macro perspective, while there's a lot of discussion about tariffs and economic impacts, it seems that healthcare providers are not significantly affected. I don’t foresee any short-term issues that would negatively impact our tenants’ ability to pay rent.

Barry Oxford, Analyst

Okay. Thanks for the color guys.

Dave Dupuy, CEO

Thank you, Barry.

Operator, Operator

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

Jim Kammert, Analyst

Hi. Good morning. Thank you. Could you remind me, I apologize, on the $169 million pipeline, under what conditions or circumstance could CHCT not have to proceed and not have to acquire? I’m just trying to understand, are they absolute obligations or depending on how the company evolves, what you could do?

Dave Dupuy, CEO

They are obligations for us to acquire. Now, we certainly have a relationship with the developer and there’ve been times if it’s a development project that either he or us or both of us have decided it’s not the right opportunity, then we would move on. But I think you should expect that this $170 million pipeline, which again, Jim, is we’re going to do over the next three years. I think, everybody should consider that pipeline as a solid pipeline and one that we expect to close on.

Jim Kammert, Analyst

Yeah.

Dave Dupuy, CEO

I think, everybody should consider that pipeline as a solid pipeline and one that we expect to close on.

Jim Kammert, Analyst

Fair enough. And as regards the geriatric psychiatric tenant, I think it’s about $22 million where the original loan or advance to them. In the event that they were to sell their assets or sell the business, where do your notes kind of stand vis-à-vis the other creditors? Because I know you wrote off about half of them or reserved for half. I’m just trying to think about what happens in that circumstance where you stand, please?

Dave Dupuy, CEO

Yeah. So really the only creditors, certainly you’ve got trade creditors that you have to be cognizant of and that’s part of the overall working capital of the business. But there is a $4 million accounts receivable line of credit that a commercial bank currently has and they have a first priority security interest on the AR. We have a second lien on the AR, as well as a first lien on all the other assets of the borrower. So those borrowers are co-borrowers on our notes, as well as we have all the stock of those subsidiaries pledged to our notes.

Jim Kammert, Analyst

Okay. I appreciate that detail. Thank you. It’s all for me.

Dave Dupuy, CEO

Thanks, Jim.

Operator, Operator

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

Dave Dupuy, CEO

Well, I appreciate everyone joining us for the call and look forward to hopefully seeing many of you at NAREIT coming up in June. Thank you very much.

Operator, Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.