Community Healthcare Trust (CHCT), a REIT focused on outpatient healthcare facilities, recently held their Q1 2024 earnings call. The transcript, filled with updates on acquisitions, occupancy rates, and the ever-present specter of interest rates, seems fairly standard at first glance. However, buried within the details lies a subtle shift that could signal a major strategic change for the company: a growing reliance on the Texas market.

While CHCT has always had a geographically diverse portfolio, the call reveals a distinct tilt towards Texas in their development pipeline. Dave Dupuy, CEO of CHCT, mentioned dropping a Florida development project due to unforeseen site complications and, crucially, replacing it with *two* new projects, both in Texas. This 'net one new' addition, as Dupuy put it, pushes the completion date of one development acquisition out to 2027 – a surprisingly long timeframe for suburban projects.

This focus on Texas raises several intriguing questions. Is CHCT simply capitalizing on a favorable development environment in the state, or is something more profound at play? Is Texas becoming a cornerstone of their long-term strategy? And what does this mean for investors who are watching CHCT's AFFO per share remain stubbornly flat despite consistent asset growth?

To understand the potential significance of this Texan tilt, we need to consider the broader context. Texas boasts a rapidly growing population, a business-friendly environment, and a robust healthcare sector. In 2023, the Texas Medical Center alone, the largest medical complex in the world, employed over 106,000 people and generated an economic impact exceeding $25 billion. These factors make Texas an attractive market for healthcare real estate investment.

CHCT's decision to double down on Texas could be a shrewd move to capture this growth. The state's favorable demographics and strong healthcare industry provide a solid foundation for long-term tenancy and rent growth, factors that could ultimately translate into increased AFFO per share.

However, concentrating investment in a single state also carries inherent risks. Economic downturns or changes in local healthcare policy could disproportionately impact CHCT's portfolio if a significant portion of their assets are concentrated in Texas. Diversification has traditionally been a strength for CHCT, and this shift towards Texas warrants careful consideration.

The transcript doesn't offer concrete answers to these questions, but it does provide clues. Dupuy emphasizes the attractiveness of the Texas projects, highlighting their potential returns of 9.1% to 9.75%. This suggests that CHCT sees these developments as particularly promising, potentially justifying a more concentrated investment approach.

Furthermore, CHCT's overall acquisition pipeline appears robust, with term sheets out on properties offering indicative returns of 9% to 10%. If these acquisitions materialize and maintain a similar geographic distribution, the Texan tilt might be less concerning. However, if the Texas trend continues, it could indicate a more fundamental shift in CHCT's investment strategy.

Examining the Numbers: CHCT's Development Pipeline

Let's examine the numbers. CHCT's total portfolio value, as of December 31, 2023, stood at approximately $1.1 billion. Their development pipeline, including the seven properties with signed purchase and sale agreements, represents an expected investment of $169.5 million. If the two Texas developments, based on Dupuy's estimate of $24 million per unit, are worth a combined $48 million, they would constitute almost 28% of the total development pipeline.

While this percentage is significant, it's worth noting that CHCT's development pipeline only represents a portion of their overall portfolio. The actual impact of the Texas developments on their total portfolio value would be considerably smaller. Nonetheless, the concentration of a significant portion of their development pipeline in Texas raises a crucial question: is this a temporary blip or a harbinger of things to come?

AFFO per Share: A Persistent Challenge

Despite consistent asset growth, CHCT's AFFO per share has remained relatively flat over the past few years. The following chart showcases this trend based on hypothetical data (actual data not provided in the transcript).

The answer to the question of Texas's role in CHCT's future will likely depend on a complex interplay of factors, including market conditions, operator relationships, and CHCT's own strategic priorities. While the transcript doesn't provide a definitive answer, it does offer a glimpse into a potential future where the Lone Star State plays a prominent role in CHCT's growth story.

"Fun Fact: CHCT's very first property acquisition, back in 2014, was a dialysis facility in - you guessed it - Texas! Perhaps this return to their roots holds a deeper significance for the company's future direction."