Executive Summary / Key Takeaways

• The geriatric behavioral hospital tenant crisis has created a $20.4 million overhang through credit loss reserves and interest reversals, but a signed letter of intent for sale to an experienced operator represents the most credible path to resolution, with closing expected in Q1 2026
• Management's pivot from ATM equity issuance to capital recycling reflects prudent discipline at a depressed share price, funding selective 9-10% cap rate acquisitions through asset sales at 7.5-8% cap rates while keeping leverage stable at 1.25x debt-to-equity
• Portfolio fundamentals remain intact beneath the surface: 90.1% occupancy with management guiding to 50-100 basis points of improvement by year-end, a 6.7-year weighted average lease term, and a diversified base of 200 properties across 36 states
• Financial performance shows stability with 5% revenue growth and an 85% AFFO payout ratio, but rising interest expense (+15.7% year-to-date) and one-time G&A spikes from executive turnover demonstrate the margin pressure facing smaller REITs
• The investment case hinges on three execution variables: timely tenant resolution, delivery of promised occupancy gains, and successful capital recycling without incremental leverage, with the current valuation at 0.95x book and 7.97x EV/revenue reflecting market skepticism

Setting the Scene: The Outpatient Healthcare REIT Niche

Community Healthcare Trust Incorporated, founded on March 28, 2014 in Maryland, operates as a fully-integrated healthcare REIT with a singular focus on owning income-producing outpatient properties. The company has methodically built a $1.2 billion gross investment portfolio spanning 200 real estate properties across 36 states, totaling 4.6 million square feet with a weighted average remaining lease term of 6.7 years. This concentrated strategy targets the structural shift in healthcare delivery from inpatient to outpatient settings, positioning CHCT to capture demographic tailwinds from an aging population and rising healthcare spending.

The business model is straightforward: acquire properties leased to hospitals, physicians, and healthcare systems, then generate predictable rental income through long-term net leases. As of September 30, 2025, the portfolio achieves 90.1% occupancy, with medical office buildings comprising 93 properties and $474.3 million of gross investment, while inpatient rehabilitation hospitals represent 10 properties and $224.8 million. This diversification across property types, geographic markets, and tenant relationships forms the foundation of CHCT's investment proposition, though the scale remains modest compared to sector leaders.

In the competitive landscape, CHCT occupies a niche position with less than 1% market share against giants like Omega Healthcare Investors ($17.5 billion enterprise value) and Sabra Health Care REIT ($7.1 billion EV). While Omega dominates skilled nursing facilities and Sabra maintains a diversified senior housing and medical office portfolio, CHCT's pure-play outpatient focus creates differentiation but also limits bargaining power with capital providers and tenants. The company's sub-market expertise in non-metro healthcare hubs enables targeted acquisitions that larger REITs might overlook, yet this specialization leaves CHCT vulnerable to tenant concentration risks that more diversified peers can absorb more easily.

Technology, Products, and Strategic Differentiation

CHCT's "product" is its ability to source and manage outpatient healthcare properties at yields that justify its cost of capital. The company targets acquisitions in the 9% to 10% cap rate range, a disciplined approach that management emphasizes has become more selective amid the current share price environment. This strategy stands in contrast to the 7.5% to 8% cap rates at which CHCT is disposing of non-core assets, creating a 150 to 200 basis point spread that generates accretive growth without equity dilution.

The property type mix reveals a deliberate diversification strategy. Inpatient rehabilitation hospitals represent the largest single category at $224.8 million, followed by acute inpatient behavioral facilities at $130.5 million. This behavioral exposure, while offering higher yields, has proven to be the portfolio's Achilles' heel. The geriatric behavioral hospital tenant operating across six properties has created a cascading credit crisis, demonstrating how specialty asset classes can introduce idiosyncratic risk that medical office buildings typically avoid.

Geographic concentration in Texas ($184.3 million), Illinois ($141.3 million), and Florida ($137.4 million) provides regional density that enables operational efficiencies and local market expertise. However, this same concentration means that regulatory changes or reimbursement pressures in key states could disproportionately impact performance. The tenant roster includes recognizable healthcare systems like Lifepoint Health and US HealthVest, yet the top three tenants represent significant concentration risk for a REIT of CHCT's size.

Financial Performance & Segment Dynamics

Third quarter 2025 revenue of $31.09 million grew 4.9% year-over-year, driven primarily by $1.2 million in contributions from properties acquired in 2024 and 2025. This acquisition-fueled growth model is standard for healthcare REITs, but CHCT's smaller scale means each transaction has a more pronounced impact on overall performance. For the nine months ended September 30, 2025, rental income increased 5.9% to $90.25 million, with acquisitions contributing $3.9 million of the $5.1 million total increase.

Adjusted Funds From Operations of $15.1 million in Q3 2025 rose 3.1% year-over-year, supporting an 85% dividend payout ratio that remains comfortably within the REIT sector's typical range. This coverage ratio provides confidence in the current $0.465 quarterly dividend, though the 12.27% dividend yield suggests the market questions its sustainability. The AFFO growth, while positive, has decelerated from historical rates due to the geriatric tenant's transition to cash basis accounting and the associated loss of interest income.

Interest expense increased 13.1% in Q3 and 15.7% year-to-date, reaching $6.9 million for the quarter. This pressure stems from higher weighted average balances on the revolving credit facility and the replacement of interest rate swaps in 2024 with forward-starting swaps at higher rates. With $256 million outstanding on the $400 million revolver and $180 million of floating rate exposure, each Federal Reserve rate cut provides measurable relief, but the overall trend demonstrates how smaller REITs face disproportionate financing costs compared to larger peers with better credit ratings.

General and administrative expenses decreased $0.3 million in Q3 due to lower compensation costs, but year-to-date G&A surged $6.1 million or 42.6%, including $4.6 million in accelerated amortization and $1.3 million in severance related to an Executive Vice President's termination. These one-time charges mask underlying operational efficiency but highlight the organizational instability that can accompany leadership transitions at smaller REITs.

Outlook, Management Guidance, and Execution Risk

Management's guidance centers on three critical pillars: tenant resolution, occupancy recovery, and disciplined capital deployment. The geriatric behavioral hospital tenant, representing $3.2 million in annual base rent and $2.5 million in annual note payments, signed a letter of intent in July 2025 to sell its operations to an experienced behavioral healthcare operator. While management hopes for a Q4 2025 closing, they acknowledge Q1 2026 is more realistic. The buyer's financial resources and similar property portfolio suggest the facilities will remain operational, but CHCT has taken a full reserve on outstanding notes and interest, signaling low expectations for recovering arrears.

Occupancy improvement represents the most significant organic growth opportunity. Management anticipates a 50 to 100 basis point increase by year-end 2025, driven by strong leasing activity across the portfolio, with an additional 100 basis points or more in 2026. This would bring occupancy from the current 90.1% toward the 93% long-term target. The weighted average lease term increased slightly to 6.7 years, providing stability even as new leases commence. Three redevelopment projects with long-term tenants secured will contribute additional rent, with one commencing after mid-2026 representing a meaningful contribution.

The acquisition pipeline includes six properties under definitive purchase agreements for $146 million, with expected returns of 9.1% to 9.75%. Management maintains the $120 million to $150 million annual acquisition target is achievable but emphasizes the bar for yields has been raised due to the share price. The strategy relies on capital recycling rather than ATM issuance, with an expected inpatient rehabilitation facility sale in Q4 2025 generating an $11.5 million gain through a 1031 exchange to fund a fourth-quarter acquisition.

Risks and Asymmetries

The tenant resolution timeline presents the most material risk to the investment thesis. If the behavioral hospital sale fails to close, CHCT faces prolonged cash basis accounting, potential vacancy across six properties, and additional impairment charges. Management's statement that "we've got patience, but it's not unlimited" suggests they may pursue alternative remedies, including property-level action, but any disruption would immediately pressure AFFO and dividend coverage. The full reserve on notes and interest receivable indicates management has already written off historical arrears, limiting downside surprise but also capping recovery potential.

Occupancy improvement assumptions appear ambitious given the portfolio's current trajectory. While management cites strong leasing activity, the 60 basis point decline in Q3 demonstrates that tenant issues can emerge unexpectedly. If the promised 100 to 150 basis points of improvement fails to materialize by mid-2026, the growth narrative collapses and the high dividend yield becomes unsustainable. The watch list of 15 to 20 names among 300 tenants suggests credit issues are a normal part of healthcare real estate, but CHCT's smaller scale means each problem tenant has outsized impact.

Capital recycling dependency creates external risk beyond management's control. The ability to sell non-core assets at 7.5% to 8% cap rates depends on buyer demand and financing conditions. If disposition markets weaken, CHCT must either slow acquisitions, increase leverage, or issue dilutive equity at depressed prices. Management's commitment to keep leverage at current levels provides discipline but constrains growth flexibility. The $144 million remaining revolver capacity offers cushion, but drawing additional debt would increase interest expense and reduce AFFO.

Scale disadvantages compound these risks. At $953 million enterprise value, CHCT lacks the diversification and financing access of Omega Healthcare Investors ($17.5B EV) or Sabra Health Care REIT ($7.1B EV). This size differential translates to higher borrowing costs, limited tenant diversification, and reduced negotiating power. While the outpatient focus provides differentiation, it also concentrates exposure to reimbursement pressures and regulatory changes affecting ambulatory care.

Valuation Context

Trading at $15.11 per share, CHCT carries a $429.9 million market capitalization and $953.1 million enterprise value. The valuation metrics reflect market skepticism about execution risks: price-to-book of 0.95x indicates shares trade below stated net asset value, while the 12.27% dividend yield signals concern about sustainability. Enterprise value to revenue of 7.97x represents a significant discount to Omega Healthcare Investors (OHI) (15.26x), Sabra Health Care REIT (SBRA) (9.51x), and National Health Investors (NHI) (14.11x), suggesting the market applies a liquidity and scale discount.

Price to operating cash flow of 7.60x compares favorably to peers trading at 13-16x, but this discount stems from negative profit margins (-6.27%) and return on equity (-1.66%) driven by tenant reserves. The 85% AFFO payout ratio provides more relevant dividend coverage than the 288% GAAP earnings payout, yet the market focuses on reported losses. Debt to equity of 1.25x remains reasonable for a REIT, and the 3.40 current ratio demonstrates adequate liquidity, but interest coverage pressures from rising rates create vulnerability.

The valuation framework suggests investors are pricing in a high probability of continued tenant issues and slow occupancy recovery. If management executes on the three key variables—tenant resolution, occupancy gains, and capital recycling—the discount to peer multiples could narrow substantially. Conversely, any deterioration would likely pressure the dividend and push shares toward a steeper discount. The current price appears to fairly reflect execution risk while offering asymmetric upside if the operational turnaround materializes as guided.

Conclusion

Community Healthcare Trust sits at a critical juncture where resolving its geriatric behavioral hospital tenant crisis could remove the primary drag on AFFO growth and validate management's capital recycling strategy. The portfolio's underlying quality—evidenced by a diversified base of 200 outpatient properties, strong lease terms, and targeted occupancy improvements—remains intact beneath the surface disruption caused by one troubled tenant. Management's discipline in avoiding dilutive equity issuance while maintaining leverage at conservative levels demonstrates prudent capital allocation, even if it constrains near-term growth velocity.

The investment thesis ultimately depends on execution of three interdependent goals: completing the tenant sale in Q1 2026, delivering 150 basis points of occupancy improvement, and recycling capital at accretive spreads without increasing debt. Success on these fronts would narrow the valuation discount to healthcare REIT peers and support the current dividend, while failure would pressure both AFFO and the share price. For investors willing to underwrite management's operational guidance, the current valuation below book value and discounted cash flow multiples offers a compelling risk-adjusted entry point, with the tenant resolution serving as the catalyst that could unlock the portfolio's embedded value.