Executive Summary / Key Takeaways

• Niche Expertise and Strategic Focus: Community Healthcare Trust (CHCT) is a specialized healthcare REIT concentrating on income-producing outpatient facilities across 36 states, a focused strategy that has historically driven consistent growth and dividend increases since its 2014 IPO.
• Resilience Amidst Challenges: Despite a significant credit loss reserve and ongoing negotiations with a troubled geriatric behavioral hospital tenant, CHCT's core portfolio demonstrates underlying revenue growth and operational stability, with management actively pursuing a resolution by year-end 2025.
• Disciplined Capital Allocation: Facing a depressed share price, CHCT is strategically prioritizing "capital recycling" through selective asset sales to fund its robust acquisition pipeline, aiming to maintain modest leverage and avoid dilutive equity issuance.
• Growth Trajectory and Operational Upside: A substantial acquisition pipeline of $146 million, coupled with ongoing redevelopment projects and a renewed focus on driving portfolio occupancy, positions CHCT for future Adjusted Funds From Operations (AFFO) growth.
• Consistent Shareholder Returns: CHCT has maintained an impressive track record of increasing its common stock dividend every quarter since its IPO, with the latest declaration at $0.4725 per share, reflecting management's confidence in future cash flow generation and dividend coverage.

The Foundation: A Specialized REIT in a Dynamic Sector

Community Healthcare Trust, established in March 2014, has carved out a distinct niche within the healthcare real estate sector. As a self-administered, self-managed REIT, CHCT focuses on acquiring and owning income-producing properties primarily associated with outpatient healthcare services across target sub-markets throughout the United States. This specialized approach has been a cornerstone of its strategy, allowing the company to build a portfolio of 200 properties totaling approximately 4.5 million square feet across 36 states, with gross investments reaching approximately $1.2 billion as of June 30, 2025.

The company's history is marked by consistent expansion. From revenues of $8.63 million in 2015, CHCT steadily grew its top line, reaching $115.79 million by the end of 2024. This growth reflects a disciplined acquisition strategy, exemplified by the nine properties acquired in 2024 for $72.1 million, nearly all of which were fully leased with long-term agreements. This foundational strength in targeted acquisitions and property management underpins CHCT's ability to generate stable rental income.

Competitive Landscape and Operational Moats

The healthcare REIT sector is dominated by large, diversified players such as Welltower Inc. (WELL) and Ventas Inc. (VTR), alongside more specialized entities like Healthcare Realty Trust Incorporated (HR) and Medical Properties Trust Inc. (MPW). CHCT, with an estimated 2-5% aggregate market share, distinguishes itself through its laser focus on outpatient facilities, a segment that often offers stable demand and lower capital intensity compared to acute care hospitals or senior housing.

While larger competitors like WELL, with assets around $50 billion, benefit from significant economies of scale, potentially achieving 10-15% lower operating costs per square foot, CHCT's operational "technology" lies in its integrated, self-managed model and deep expertise in its niche. This specialized asset management allows CHCT to achieve potentially 5-10% higher occupancy rates in its targeted sub-markets due to a more granular understanding of local healthcare needs and tenant relationships. This operational know-how, while not a proprietary hardware technology, acts as a competitive moat, enabling more efficient property management, proactive tenant engagement, and a streamlined acquisition process for its specific asset class.

Compared to VTR, which boasts a broader portfolio including life sciences and faster adoption of digital health tools, CHCT's cost efficiency in outpatient settings (5-10% lower operating costs per unit) is a key differentiator. However, CHCT trails in overall growth rates, with historical revenue expansion of 4-6% annually compared to WELL's 7% and VTR's 5-7%. This suggests that while CHCT excels in its specific domain, its smaller scale limits its ability to capture broader market opportunities as quickly as its larger, more diversified peers. The company's management acknowledges this, emphasizing that its "bar has been raised" for acquisition yields given its current share price, focusing on accretive deals.

Broader industry trends, such as the increasing demand for technologically advanced infrastructure (e.g., for AI and data centers), could indirectly benefit healthcare facilities. CHCT's focus on modern outpatient properties positions it to adapt to these evolving needs, potentially offering a competitive edge over REITs with older, less adaptable portfolios. However, the electrification trend could also raise facility costs, impacting margins across the industry, including for CHCT.

Financial Performance: Navigating Headwinds with Underlying Strength

CHCT's financial performance in the second quarter of 2025 reflected both underlying portfolio strength and the impact of specific challenges. The company reported a net loss of $12.557 million for Q2 2025, an increase from a $10.427 million net loss in Q2 2024. This was significantly influenced by two primary factors.

Firstly, the company recorded an additional credit loss reserve of approximately $8.7 million on notes receivable from a geriatric behavioral hospital tenant, following an $11.0 million reserve in Q2 2024. This tenant, operating in six of CHCT's properties, has been unable to pay full rent and interest, leading to rent recognition on a cash basis. Secondly, general and administrative expenses surged by $5.8 million to $10.559 million in Q2 2025, primarily due to $4.6 million in non-cash accelerated amortization of stock-based compensation and $1.3 million in severance and transition-related expenses linked to an executive departure. As CFO William Monroe noted, "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."

Despite these headwinds, the core business demonstrated resilience. Rental income increased by 8% to $30.128 million for Q2 2025 compared to Q2 2024, driven by approximately $0.8 million from recent acquisitions and a $1.2 million increase from the reversal of revenues related to the aforementioned geriatric tenant. Excluding the $1.7 million reversal of interest receivables from this tenant, total revenues would have been approximately $30.7 million, representing a healthy 2.2% quarter-over-quarter growth in the core portfolio. Interest expense also rose by 10.1% to $6.592 million due to increased borrowings and interest rates on the Credit Facility.

Strategic Initiatives and Outlook

CHCT's management is proactively addressing current challenges while laying the groundwork for future growth. The most pressing issue, the geriatric behavioral hospital tenant, is nearing a potential resolution. On July 17, 2025, the tenant signed a letter of intent to sell its operations to an experienced behavioral healthcare operator, who would then sign new or amended leases for CHCT's six properties. Management is in active negotiations, aiming for a resolution "ideally by year-end." While they do not expect a "meaningful pickup" from the fully reserved notes, this transaction is crucial for stabilizing rental income from these properties and is expected to contribute a "significant amount of additional AFFO." Importantly, CHCT has stated that similar highly leveraged lending arrangements with tenants are "not something we would look to do going forward."

The company's growth strategy remains robust, with a substantial acquisition pipeline. CHCT has definitive purchase and sale agreements for six properties, representing an aggregate expected investment of $146 million, with anticipated annual returns ranging from 9.1% to 9.75%. One of these properties is expected to close in Q4 2025, with the remainder closing throughout 2026 and 2027. This aligns with management's stated annual acquisition target of $120 million to $150 million, which they believe is "achievable."

To fund this pipeline, CHCT is strategically focused on "capital recycling" through selective asset sales rather than issuing equity via its At-The-Market (ATM) program, given its "depressed share price." Management believes there is a "200 to 250 basis point type spread" between the implied cap rate on its equity and realistic disposition cap rates, making asset sales an attractive, non-dilutive funding source. This approach ensures the company maintains its "modest leverage levels," despite having $174 million in remaining borrowing capacity on its $400 million Revolving Credit Facility.

Operationally, CHCT is committed to enhancing portfolio performance. While occupancy saw a slight decrease to 90.7% in Q2 2025, management aims to add "100 basis points or more to our occupancy" into 2026, driven by "good leasing activity" and the expertise of the newly appointed Senior Vice President of Asset Management, Mark Kearns. Several redevelopment projects are also underway, with one commencing its lease on July 1, 2025, expected to contribute AFFO in late Q4 2025 and Q1 2026.

Risks and Considerations

Despite the positive outlook, investors should be mindful of several key risks. The ongoing resolution of the geriatric tenant situation, while progressing, still carries execution risk. Any delays or unfavorable terms in the sale of operations could prolong the impact on CHCT's financials. Furthermore, the broader macroeconomic environment, characterized by persistent inflation and fluctuating interest rates, could impact operating expenses and borrowing costs. While CHCT uses interest rate swaps to hedge a portion of its debt, variable-rate exposure remains. The company's reliance on capital recycling for acquisitions, while prudent given its share price, depends on favorable disposition markets. Lastly, while the tenant watch list is diversified and contains no other top 10 tenants, the inherent nature of healthcare operations means tenant-specific issues can arise, requiring ongoing proactive management.

Conclusion

Community Healthcare Trust stands at a pivotal juncture, demonstrating resilience and strategic adaptability in a dynamic healthcare real estate market. The company's core investment thesis is rooted in its specialized focus on outpatient facilities, a segment offering stable demand and growth potential. While the financial impact of the geriatric behavioral hospital tenant has been a significant headwind, management's proactive pursuit of a resolution, coupled with a disciplined capital allocation strategy centered on asset recycling, positions CHCT to mitigate these challenges and unlock future value.

The robust acquisition pipeline, combined with internal redevelopment projects and a renewed emphasis on driving portfolio occupancy, provides a clear pathway for accretive AFFO growth. CHCT's consistent dividend increases, a hallmark of its shareholder-friendly approach, underscore management's confidence in the company's long-term cash flow generation. For discerning investors, CHCT represents an opportunity to invest in a specialized REIT with a proven track record, a clear strategic roadmap, and a commitment to disciplined growth, poised to capitalize on the evolving healthcare landscape.