Q4 2023 American Healthcare REIT Inc Earnings Call
Paul.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask the question. During this time simply press Star then the number one the oncor telephone keypad to withdraw your question Press Star One again I would now like to turn the conference over to Allen Peterson.
<unk> President of Investor Relations and Finance. Please go ahead.
Good morning, Thank you for joining us for our fourth quarter 2023 earnings Conference call.
And me today are Dave <unk>, President and CEO, Brian <unk>, Chief Financial Officer, Gabriel Hi, Chief operating Officer, and Stephane <unk> Chief investment Officer.
On today's call, Danny Gabe and Brian will provide prepared remarks discussing our company financial results for 2023 as well as our outlook for the current year and recent news relating to American health care.
Following these remarks, we will conduct a question and answer session with covering research analysts.
Please be advised that this call will include forward looking statements all statements other than statements of historical facts made during this conference call are forward looking statements that are subject to numerous risks and uncertainties that could cause actual results to differ materially from those projected in these statements. These risks and other factors that could adversely affect our business.
And future results are described in our press releases and in our filings with the SEC.
All forward looking statements speak only as of today March 22024, we assume no obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise except as required by law.
Reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable measures calculated in accordance with GAAP are included in our earnings release and supplemental information package as a note our operating and financial results, including GAAP and non-GAAP financial measures are fully detailed in our earnings release and supplemental information package.
You can find these documents as well as SEC reports and the audio webcast replay of this conference call on our website at American healthcare REIT Dot com.
With that I will turn the call over to our president and CEO Danny property.
Thank you Alan good morning, or good afternoon, everyone and thank you for joining American healthcare rates first earnings call as the New York Stock Exchange listed company.
We are proud to be part of the listed REIT community and are optimistic as ever about the prospects for our business before we begin I'd like to take a moment to thank all of our EHR Board members employees and supporters for the countless hours. They have dedicated over the last 18 months since we began preparing for the common equity offering we completed in February.
<unk> of this year and our related listing on the New York stock exchange for myself and our executive team we say thank you.
Now, let's get started.
Alan mentioned, I'm, Dani Croskey, President and CEO of American health care, REIT or <unk> for short.
Today, I will start with a brief high level overview of who we are taking the list. There's a better understanding of EHR and provide some brief comments on where we intend to go from here.
Then I will turn the call over to David Bryant to discuss operating performance across our diversified healthcare portfolio and our financial positioning after the recent completion of our equity offering and listing on the NYSE.
We've had the pleasure of introducing many new investors to HR over the better part of the last year and a half.
For those of you who are still getting to know us we're a diversified health care REIT with approximately 57% of our net operating income as of the end of the fourth quarter in 2023 coming from our RIDEA operating portfolio, where we participate in the operations of the facilities that we own.
At the end of the year the majority of our RIDEA NOI, making of approximately 49% of our total NOI came from our integrated senior health campuses, which we refer to as our trilogy assets with trilogy management services operating the facilities.
Our trilogy assets comprise the largest part of our business and our unique among listed health care Reits.
To put it simply our trilogy assets are full service catering to the most of the intermediate and long term health care needs of seniors.
These primarily purpose built campuses contain assisted living and skilled nursing beds all under the same roof.
Many of the facilities also have independent living and memory care units on site.
Having all of these services within one campus provides meaningful efficiencies.
The loud trilogy to be among the best in class operators within health care real estate.
Our integrated senior Health campus segment is owned in a joint venture structure of which we own approximately 75%.
In 2023, we entered into an agreement that provides us with the option to purchase the portion of our trilogy joint venture that we do not own at a specified price through September 32025.
We believe that this is a tremendous growth opportunity with limited operating risk as we know the assets well and they are already fully consolidated in our financial statements.
Additionally, if we exercise the option we would have full control over implementing triologies external growth strategy and would result in earnings accretion since we would receive 100% of any future earnings generated by the trilogy assets.
Moving on to our senior housing operating property segment, otherwise known as shock.
We believe that this segment offers significant upside potential due to our ability to capture further occupancy and rental rate growth.
We believe that the fundamentals underpinning this segment, namely an aging population and muted supply growth will allow for stronger growth relative to our other segments over the near term.
Over the last few years, we have endeavored to engage leaning operators to manage our shop assets.
Who we believe are well suited to pursue our strategy of increasing occupancy margins and NOI.
We're bullish on the prospects for long term care over the next several years due to strong growth in demand coupled with less new supply as a result of a meaningful pullback in construction starts in recent years.
Compared to our peers, we have a greater exposure to higher acuity assisted living units, which we believe provides a superior risk adjusted return from the needs based care that these properties provide.
Shop makes up the balance of our RIDEA properties at roughly 9% of NOI for the fourth quarter of 2023 spread across 55 properties in 14 states with seven operating partners as of the end of 2023.
We expect this exposure to grow over time, given the strong bottom line trends, we anticipate in this segment over the coming years.
The balance of our NOI is split between outpatient medical buildings, and triple net leased assets, which make up approximately 27% and 13% respectively as of the fourth quarter.
Our outpatient medical buildings span the country and are well located with roughly 75% of them classified as on campus campus adjacent or affiliated with the broader health system.
90% of the segment is multi tenant, which we believe mitigates our exposure to tenant concentration risk in.
In our Triple net lease segment, we own in net lease senior housing facilities skilled nursing facilities and two hospitals.
This segment generally offers lower growth potential in our other segments with operating exposure since we primarily act as a net lease landlord in this segment and are entitled to receive contractual rent that generally benefits from annual escalators that said, we believe that this segment provides us with a stable and growing source of revenue with that we look forward to our future as a <unk>.
<unk> company.
We believe we are well positioned to deliver outsized growth driven by our focus on senior housing investments in the RIDEA structure.
And our unique access to integrated senior health campuses through trilogy.
We are seeing strong senior housing fundamentals drive portfolio performance in 2023, and because those fundamentals remains strong we continue to partner with great operators, we expect to continue to deliver operating results that create value for our shareholders in the future.
Now I'll turn it over to Gabe to discuss recent operating trends within our portfolio.
Thank you Danny that was a great overview I am excited to report the fourth quarter of 2023 was another strong quarter and capped off a very strong year, we executed on aggressive organic growth initiatives and our portfolio continued to deliver outsized growth driven by highly attractive fundamentals in the senior housing and care space across our portfolio same store NOI.
For the fourth quarter grew by an impressive nine 5% year over year, our operating portfolio, which consists of our trilogy investment in shop segment led the way our trilogy investment in particular continued to perform well trilogy finished 2023 with occupancy roughly 300 basis points higher than in 2022. This is particularly.
Really encouraging because triologies occupancies are already generally very high in the industry, roughly 300 basis points higher than the Nic average for both assisted living and skilled nursing and we were happy to see trilogy continue to trend well above industry average.
A testament to the quality of the operator and the care they provide for residents.
That occupancy growth that trilogy, coupled with strong rate growth both in private pay and government reimbursement rates drove healthy revenue growth that substantially outpaced expense growth.
And as a result, <unk> achieved 14% same store NOI growth for the year and the nice margin expansion in the fourth quarter to 16, 7%.
To put that margin in context, our trilogy facilities are generally comprised of 45% senior housing beds with the balance predominantly being skilled nursing beds.
Have a good skilled nursing margin is approximately 10% to 12% today and a good assisted living margin is generally in the mid to high twenties, our trilogy facilities given their business mix generally compare favorably with mid to high teen NOI margins that are growing our senior housing operating portfolio also continues to benefit from strong senior how.
<unk> fundamentals, we saw compelling NOI growth of 44, 9% for the fourth quarter of 2023, and 27, 2% for the full year occupancy grew at a torrid pace Q.
Q4, 2023 occupancy was 415 basis points above Q4 2022.
We believe that much of that occupancy growth can be attributed to our active asset management strategies.
Across our portfolio to Dan's earlier comments, we believe that we are still in the early innings of capturing the full value of the current supply demand dynamic that has been a tailwind for our RIDEA portfolio than our shop portfolio still has room to grow even after delivering strong results in 2023 and.
In order to deliver on that value, we've been proactive in making sure that we get the right operator and the right building in 2023, we executed several operator transitions across the portfolio and we recently completed our last planned operator transition within our shop segment, establishing our first relationship with heritage communities, who took over management of two of our assets.
In Nebraska earlier. This month, we have already started to see the benefit of those transitions and we believe that we're well positioned to unlock more value in 2024, we anticipate the full benefit of the operator transitions to be realized over time as we generally expect occupancy to build first drive revenue and then pull through to NOI after incurring some.
Typical operator transition costs based on what we've seen we have conviction the right operator can drive outsized returns we.
We saw this in play in our Texas Senior housing portfolio, where we transition management and one of our top performing operators at the time of acquisition in late 2022.
Near immediate improvement in performance with occupancy increasing by roughly 900 basis points in under a year, we hope to replicate that strategy with an acquisition that we completed in February where we acquired a 12 campus portfolio of senior housing assets in Oregon by essentially <unk>, our mezzanine debt, we were able to acquire that asset at an attractive basis.
Roughly $94 million and $110000 per bed and immediately transition the portfolio to one of our existing operator relationships.
In short, we think our roster of proven operators will deliver on growth in 2020 'twenty four.
Our team also approached 2023 with a keen focus on expense management with a particular focus on agency labor usage and I'm happy to report that we've seen meaningful improvements on our expense controls, which contributed to our strong bottom line performance since the peak of agency labor usage in 2022, our shop assets have seen close to a 70%.
Cent reduction in agency labor costs, and we expect those costs to continue to trend down over time as we focus on that issue next year as we look at early results for our operating portfolio in 2020 for occupancy continues to trend upward to start in the first quarter total portfolio spot occupancies for our shop and integrated senior health campuses are currently up to.
250 basis points, and 100 basis points, respectively from the average reported occupancy during just the fourth quarter of 2023 with shop at roughly 83% and trilogy at roughly 86%.
Our outpatient medical portfolio produced same store NOI growth of three 2% for the full year 2023, we're.
We're pleased with that level of growth in a business that has been dependent on strong leasing that being said sustaining that level of growth in 2024 would be a bit of a surprise, we're seeing broader industry trends of health systems consolidating space and downside.
Of course, our team will again take a proactive approach to leasing in 2024, but we expect known Vacates early in the year that require re leasing as well as a tougher comp from a good 2023 to challenge our ability to deliver on growth in that segment in 2020 for the.
The remainder of our Triple net portfolio delivered a steady 2% NOI growth for the full year 2023, and we're seeing the strong fundamentals in senior housing and having a positive impact on our tenants' businesses as well.
I'll now pass it over to Brian to discuss the recent completion of our public equity offering and our listing on the New York stock exchange, our financial position and our 2024 outlook with more detail before turning the call over to Q&A.
Thanks Gabe.
As many of you know recently in early February American healthcare REIT completed an offering of $64 4 million shares of common stock and subsequently listed those shares on the New York stock exchange, resulting in the first REIT IPO in over two years.
The purpose of the IPO was not only to provide liquidity to our existing shareholder base, but also to use proceeds from the offering to improve our balance sheet.
We raised nearly $773 million and utilized the net proceeds to pay down $721 million of shorter term and floating rate indebtedness at a weighted average interest rate of approximately seven 5%, which will result in significant interest expense savings.
Going forward and a large reduction in floating rate debt outstanding after the recent debt Paydowns and utilizing our Q4 2023 annualized adjusted EBITDA, We project that our net debt to annualized adjusted EBITDA should be in the low six times range on a pro forma.
Emma basis.
We will be highly selective regarding external growth opportunities that we choose to take advantage of in order to maintain a conservative leverage profile. Additionally.
Additionally over time the earnings growth embedded in our portfolio such as the eight 6% same store NOI growth from 2022 to 2023 will serve to continue to Delever our balance sheet.
As we look forward to 2024, we are issuing full year guidance for normalized funds from operations of $1 18.
Two $1 24.
Per fully diluted shares outstanding.
Bedded assumptions included within that earnings guidance range would be for total portfolio same store NOI growth of between five and 7%.
The potential for approximately $68 million of continued asset sales with the proceeds used to pay down debt further improving our leverage statistics the build to the 5% to 7% same store portfolio growth involves the integrated senior health campus segment growing in the 8% to 10 <unk>.
<unk> range since growth may slow slightly since occupancy has already recovered to pre pandemic levels are.
Our shop assets are continuing to recover and projected to grow at approximately 25% to 30% in 2024.
Outpatient medical could be flat to slightly down with more on that in a minute.
And the remaining triple net leased portion of our portfolio should be up approximately 1% to 3% on a same store basis.
Please remember that our same store pools for the integrated senior health campuses and shop include only about two thirds of those combined beds in 2023.
Which means that our overall company net operating income should grow by more than just the same store NOI growth rates regarding the outpatient medical segment guidance, we have some known vacates coming up at the beginning of this year, which will reduce occupancy.
And when factoring in the time to lease up and build out 10 spaces, we expect to have lower growth in the short term.
Overtime, we expect the outpatient medical segment to grow in the 2% to 3% range subject to explorations or incremental additional leasing.
With respect to capital allocation at our current cost of capital coupled with our desire to maintain a conservative leverage profile, we will be judicious in what acquisition and development opportunities that we pursue going forward.
The exception is the portfolio of senior housing assets, we took over last month in Oregon discussed earlier, which won't be in the same store portfolio for some time.
We continue to expose existing assets in a measured way to the market for potential disposition, although our desire to transact will be based in large part on the resulting pricing that we are able to obtain since we have no need or desire to sell assets at unreasonably high cap rates.
We are excited for the opportunity to execute on our plan as a publicly traded company throughout 2024 and beyond.
And with that operator, I would like to open it up for questions.
At this time I would like to remind everyone in order to ask a question simply press Star then the number one Andre telephone keypad.
Your first question is from the line of Joshua <unk> with Bank of America. Please go ahead.
Hi, everyone.
Behalf of Josh Canter line. Thank you for the question.
Now can you help us understand the trajectory the same store margin trilogy, and the RIDEA portfolio.
What are you seeing any guidance for the year and then second to that would be where are you thinking about the long term in terms of margin.
We've seen margins continue to improve throughout last year, and our expectations will continue to see that.
I firmly believe that we will get back to margins.
What we saw pre Covid I don't know how long, it's going to take I think a big part of that is going to be through occupancy growth.
I expect and hope that.
Occupancies will continue to grow and will surpass what we saw as far as pre Covid Occupancies I think thats going to play a big part as far as.
Continuing to show margin improvement.
And if you want to add Brian as far as where we expect maybe at the end of the year No I think that's fair I think we're we're obviously not projecting margins in our guidance, but we are seeing strength in those numbers over time and growth.
Get supercharged with the increasing occupancies.
Yeah.
Great I appreciate it thank you.
Thank you for the question.
Your next question is from the line of Ron <unk> with Morgan Stanley. Please go ahead.
Hey, Rob.
Thanks, Thanks, so much.
Just first one on the just on interest expenses I think you talked about $68 million of dispositions to pay down debt with any sort of ballpark, where what's baked into the guidance on the interest expenses.
For this year and in what sort of a good run rate.
Yes, so the.
Pro forma the offerings with the pay downs, we have approximately 1 billion 7%.
Debt remaining on a on a pro rata basis, our weighted average interest rate since we retired the bulk of our floating rate debt is probably in the 5% range.
And the use of proceeds from dispositions will be used to pay down debt.
With the goal that the debt, we're paying down is higher than our weighted average rate so probably looking in the 7% range.
The hope is that from the dispositions, we are continuing to expose assets to the market.
In evaluating the pricing that we're able to get.
We're not in a rush to sell assets.
We get really good prices, but ultimately I think that $68 million that I described earlier that we have embedded in the growth projections for the guidance.
I think that could be done in the first half of the year we.
We may continue to we will continue to expose assets, we may be able to continue to close on additional dispositions, but we can refine guidance as the year wears on.
Great. If I can just sneak one more in just going back to the same store guidance for the integrated senior health campus.
And the shop I guess.
Number one sort of what.
What what occupancy assumptions just high level going into that is this sort of a similar <unk>.
Occupancy gains over the last year is it greater or is it less.
Are there any things such as operator transitions or anything else that we should be mindful of that.
Potentially make those numbers a little bit more conservative.
Thanks.
So this is Danny I'll start out and maybe hand, it over to Gabe.
So.
We had very strong occupancy growth last year I think we are not guiding to that same type of occupancy growth in 2024.
I think we're looking at trilogy, correct me, if I'm wrong, Gabe kind of being in the high <unk> by the end of the year I think the rest of the shop portfolio kind of in the mid eighties.
Our continued margin improvement.
And so far so good but.
We'll continue to update those numbers as we close out each quarter over the next 12 months.
Yes, and I would just.
Say I mean, we can continue to have pretty deep conviction and trilogy being one of our best operators in the portfolio, what they've been able to do for the last eight years now even through Covid has been pretty impressive.
<unk> got multiple levers that they can pull to be where we expect them to be.
It could come through occupancy it could come through rate it could come through expense management.
So there are a number of factors that we're looking at there that could help improve the margin and actually beat where we're forecasting NOI to be.
But we don't want to be overly aggressive in and assuming that all of those things are going to come together at the same time to have a perfect scenario. So what happens through 2024, we still think the fundamentals are really strong in that business, we still think especially on the senior housing side of that business that they've got room to grow from an occupancy perspective.
So we will see what 24 holes.
And anything on operator transition.
I think we're done with that.
Our goal was to get the transitions more or less completed prior to the IPO.
We had the last one commenced.
Commenced this month, we've got two assets in Omaha.
We brought in a new regional operator someone local who knows the market who already operates in the market. It does very well and that is that we do not anticipate any.
More operator change outs anytime in the near future.
Thanks, so much.
Thanks for all the questions.
Question is from the line of Austin Schmidt with Keybanc capital markets. Please go ahead.
Okay great.
Thanks, Good morning, everybody good morning Dani.
Just wanted to revisit the occupancy.
Piece within the integrated senior health campuses, you mentioned with response to last question kind of reaching the high 80% range I think you finished <unk>.
23, averaging around $85 seven but then you also said you don't expect it to be quite the same level of growth. So you did 300 basis points last year, I mean should we be thinking a couple of hundred basis points is what's embedded in guidance and then we'll kind of see how as we get in to the.
More peak season of that business, where things and kind of how the year starts to play out and then also curious are you assuming that things return to kind of normal seasonality in this business as you saw a little bit of that dip in the fourth quarter of this past year.
Yes, a little bit, but it's really just a little bit of a different animal right because it's not just pure IL.
It's more than half scale and now we've added short stay high acuity scale. The average length of stay of trilogy is measured in weeks not months. So trilogy. If you look at <unk> performance over the last couple of years.
Length of stay has actually come down, but the number of admissions has gone way up so that occupancy trilogy tends to be a lot more choppy on the skilled side.
Both sides of the business had been growing very well, but al has been smooth and steady and scaled.
<unk> has trended up but it's been much more choppy.
And then seasonality it trilogy is different for example.
Because a lot of it the majority of the admissions and the skilled side of the business our hospital discharge of patients and a lot of times. They had sometimes they were hospitalized and emergency basis basis, a lot of times, it's a little bit more discretionary like a hip replacement for example, so what we see is typically before holiday weekend Christmas.
Christmas for example.
Is a great example of that we always see a big drop off the week before Christmas because any anything that can be delayed they'll delay until January and then you see a big pick up the first or second week of January so it's much more choppy with trilogy, a little bit harder to forecast. We're very pleased the thing is that the overall trend continues to go up.
And that's really what we're focused on and we expect and hope that to continue.
Just add to that Austin, you saw quarter over quarter occupancy came in a little bit of trilogy, but NOI grew by 13, 5% quarter over quarter. So to my earlier point occupancy is one lever that they have to really drive the NOI that you kind of have to sensitize that.
The different levers that they have it could come from occupancy it could come from rate growth could come from expense management.
Not just dependent on hitting a certain occupancy target.
No.
That's a great point I mean with respect to maybe mix then is there anything last year. The Q mix kind of we saw a little bit of change within the Q mix as a percentage of revenue I mean, any do you expect that to continue to come down or sort of stabilized with where that was.
In the fourth quarter or for the full year last year.
If anything I think that <unk> is going to continue to go up their senior housing business is growing really fast and they've made investments on the sales and marketing team.
Both from.
Our human capital side or otherwise.
And we're looking to grow that business I think right now which is kind of exciting is in their independent living villas, they've got the Villa concept, which I think some of the people on the call as seen before where it's a duplex you've got your own kitchen, you've got your own garage, you've got your own neighborhood basically that you're living with one kind of clubhouse and that product runs at about 95.
And occupancy so to the extent that we can continue to expand the number of dealers that they have on their campuses and we've got opportunities, where we already had control of the land and we're shovel ready with projects to do that.
I think that would further.
Obviously increase the amount of private pay metrology portfolio, an interesting area for growth.
Thank you and then just last one for me I know, it's been a month and a half or so since the IPO, but stock has performed well since then and I'd just be curious to hear the team's latest thoughts on how youre thinking about executing on the trilogy purchase option from a.
Timeline perspective, as well as whats the most attractive.
Financing options too.
To fund the purchase thank.
Thank you alright, yes. This is Daniel I'll take that one so we get this question a lot obviously.
We view that purchase option.
As a terrific benefit for HR, we've got a lot of flexibility as far as timing and methodology of exercise. So we have a little over a year and a half to exercise that option. We can do it anytime we want between today and September 32025, and we have flexibility as far as methodologies. We can use cash we can use preferred equity we can use a mix.
And on.
On the one hand, we would clearly like to do with sooner rather than later, because it's very accretive to earnings now the value creation of trilogy is going to inure to us whether we exercise that today or next year. Our trilogy becomes grows more valuable as time goes by in our opinion and in.
And at the end of the day, our hope is that we will own 100% of trilogy sold all of that value will enter to EHR.
But we.
Gone through a lot of effort over the last couple of months to get our balance sheet to position. It's in today with a debt to EBITDA.
Six as Brian discussed in his comments and our goal is to keep it there so.
The price does go up a little bit on that option over time <unk> NOI grows at a much faster clip so our cap rate actually increases the longer we wait.
But our goal is to sometime between now and the next year and a half to between asset sales.
Potentially going back out to the market for new equity.
Organic EBITDA growth and external EBITDA growth as well to reach a point, where we can exercise that option, while maintaining the type of leverage that we're seeing today. So.
We'd like to get it done, but we're no theres no sense of urgency we don't have to do it.
This year or early next year, we can we can delay and if we want and we made a promise to everybody out there who invested that we will maintain the type of balance sheet that we've achieved and our goal is to continue to do that.
Thanks, everyone I appreciate the time.
Your next question is from the line of Michael Griffin with Citi. Please go ahead.
Congrats great. Thanks, Hey, what's the best.
Maybe going back to a question on the guidance, Brian you've kind of laid out the believers in your prepared remarks, but if I take the midpoint of trilogy shop, Mlps and triple net on kind of a weighted average basis I get to about 7%. So just curious what the delta between that and.
And your guidance of call it 6% at the midpoint.
Well.
Understanding guy.
Guiding to the mid point, we're simply laying out the best case scenario.
On the downside the low and the high end.
I think the the.
Difficult challenge in doing this is that numbers move around.
And some things trend better than you'd hoped and some things trend worse, but ultimately we're comfortable in that range.
I don't disagree with your math.
Applying weighted average percentage of our portfolio to the to the guidance.
But ultimately it's at.
It's difficult to say today, what its going to look like after 12 months.
Yes.
That's helpful and then maybe a broader.
Portfolio level question, particularly as it relates to trilogy. Obviously your you guys. The first publicly traded healthcare REIT with the Smith and be right. There and exposure. Obviously these are operationally intensive businesses kind of similar to shop, but I mean, how big a worry as sort of stroke.
<unk> risk to this business I guess combined with its operational nature as well.
I'll take that one.
Gabe.
There are a few different things that trilogy that make it.
Attractive for us and when we came into this investment eight years ago. These were kind of the critical factors that we like we like that it was a unique.
Assay class that serve seniors better than any other product that we had seen out there with the skilled nursing and assisted living and independent living on one campus. We like that the operator was kind of a best in class operator that had proven performance and that by the way has proven to be true for the last eight years that we've owned them, we like that they have.
Our physical plant advantage on their competitors with the average age of facility under 10 years, and we like that we have the right alignment there with the trilogy management team.
They are essentially a captive management team they manage.
All of the trilogy investments for Us Thats, a 127 assets I think at this point and their business and our business are are very aligned and that the management team at trilogy makes money off of incentive plan that it is.
<unk> devices, the bottom line <unk> growth EBITDA growth.
From a broader sniff RIDEA perspective, I think if you don't have all of those things altogether at the same time and an investment. That's that's truly unique at trilogy, you might have different concerns about entering into that type of structure, but with trilogy, we feel comfortable and by the way. This has proven itself out over the last eight years that there is a <unk>.
Partner to do it with that we created the right alignment with.
With the management team and the outside operator to make it work and we feel good about the future of trilogy, I mean, they've got a growth profile that if you were doing a triple net lease in the skilled nursing business you wouldn't be able to unlock.
So the risk reward there with the factors that I went through made it so that trilogy makes sense for us and we're excited about their growth and we're excited about the potential there.
You want to add onto that real quick so we would not do a structure like this with any other operator, Besides trilogy and gets right. We've owned trilogy for about eight and a half years, but Stefan and I back in our help peak days almost 25 years ago, we've known trilogy since the late <unk> early two thousands we had a portfolio with trilogy. It helped peak and they were our best operator back then.
And they're our best operator today.
And not only that.
And one of the things we're trying to instill across our portfolio was really that the trilogy is focus on care and service and I think that's one of the reasons <unk> been so successful is it.
When you look at Triologies, what they're focusing on yes, we all like Bottomline performance, we all like occupancy, we all like margins and NOI growth of trilogy has always put care as their number one.
<unk> service and care.
And we've been trying to instill that with everybody else and we've got our operator summit coming up first week of April we will have all of our operators meet here in California, and that's a big focus as we want that to be what we want that to be the number one focus of all our operators is if you can't provide good care and service than everything else really doesn't matter.
Do you are not going to perform well in the long term all of those other other metrics are related and one of the reasons trilogy has done so well is because of the move to value based care.
And they've been able to capture the upside not just at the federal level or at the state level, because they've got better outcomes less recidivism, they've got higher staffing because of their high level of acuity and they've really been able to outperform because of their focus on care and outcomes and like I said.
We're not looking at have any we're not looking to bring any other type of skilled operators in this kind of a structure.
We're comfortable with trilogy.
I'm not looking to expand with anyone else outside of trilogy.
Great. That's it for me thanks, guys.
Your next question is from the line of Michael Carroll with RBC capital markets. Please go ahead.
Yes, Danny our Gabe can you talk about some of the transactions that you might have within trilogy, either through new developments or redevelopment projects. I know there is some pretty good return characteristics and those types of investments are you underwriting those today or are you still trying to kind of maintain your balance sheet and think about that in the <unk>.
Future like you are with the purchase options.
So we have about $600 million of opportunities today with trilogy of about $500 million of that is the purchase option right and then we've got it's Gabe talked a little bit about the IL Bill has got five campuses, where we already have the land and we can start those projects immediately.
And then there is some expansion opportunities within trilogy as well so.
And some of it needs to be underwritten some of it doesn't I didn't even talk about the lease purchase option. So last year, we mentioned in the comments that we exercised purchase options on <unk> III trilogy leases at a at a cap rate just north of nine and Thats Theres really nothing underwrite there right. Its simple math, we were paying a little over nine lease rate we.
Bottom out so that that 9% one way so that was a north of a nine cap we have three more of those available today, where I believe our cap rates about nine in the quarter, it's a little bit higher.
Nothing to underwrite so most of our.
Most of our trilogy opportunities are already assets that we own and control and operate and manage its just a matter of exercising options now we do have the independent living villas, which.
There is underwriting involved there those are not as risk free is just buying out leases. However.
It's a 12 month bills and historically they've achieved.
Very very high single digit yield on those and they're as Gabe mentioned, there about 95% leased and they typically lease up prior to completion of construction.
So that's kind of the hurdle, we're looking to be as we kind of want to be north of a nine and we want to have it be very low risk and a very quick nine so.
That lets you really meets all of those criteria and it's really just a matter of prioritizing what we want to do first.
While maintaining the balance sheet that I talked about earlier.
Okay and do you have any of those investments I guess included in guidance like maybe the purchase options are I'm, assuming those are exercised exercisable this year.
No no nothing.
Nothing is embedded in the guidance.
Okay and those purchase options when are they exercisable. The three that you mentioned that you could have done at a nine plus.
They are exercisable today and.
I don't like to give forward looking statements, but theres more to come on that.
Okay, Great and then just last for me can you remind us how much of trilogy.
HR not outside of the purchase option I think for US on the management team members have a little stake I mean, how much of that is outstanding and is there a potential for you to acquire.
Acquire them out so your ownership stake controls you could increase maybe a little bit without exercising the bigger purchase option that you have.
Yes, so the management team at trilogy.
The CEO CFO and a few others own a percentage of trilogy and they have from the beginning and.
And that's about 8% of the total enterprise.
Are there they do have the option to put that equity to HR, and we expect them to do that and to ultimately.
A higher percentage of it.
Yes so.
So today, we own about 76% of 99, 2%.
Now.
If you're asking is our pathway to 100% ownership.
We believe there is.
Okay, great. Thank you.
Your next question is from the line of Anthony Powell with Barclays. Please go ahead.
Hey, good morning.
I guess a question on I guess your rate growth assumptions for children and shop in 2024, what are you seeing in terms of our rate growth and how would you compare to 2023.
So in 2023.
January of 2023, and remember it's not like everybody's rent goes up January 1st right. If somebody moved in in the middle of the year.
They get 12 months before the rent bumps so it kicks in over time right and of course, there's been a lot of move ins in 'twenty two 'twenty three so.
But they did it across the board, 975% increase January one 2023.
January 'twenty one at generally first of 2024. It was typically between 6% to 8% I think <unk> I think it was more like 756.
To aid with kind of portfolio as a whole so again across the board to seven 5% increase.
Not just al and IL, that's on private pay skilled as well, but it doesn't all kick in January one so anybody who moved in mid year is going to see their increase on their 12 month anniversary.
Got it thanks, and maybe more broadly.
Youre, drawing a lot both externally and internally.
Shop and trilogy, what's the ideal exposure to triple net and MLB long term kind of are you expanding areas shrinking there what's your views on those businesses.
Segments, where you are now.
Now on the road.
Well I think risk adjusted returns change over time.
As you've heard on this call and in our prior conversations we've been reducing our exposure to medical outpatient.
Today, I think I think Gabe mentioned it was about 27% of Q, Brian mentioned excuse me. It was about 27% of Q3, NOI I remember not that long ago was 35%.
So we've been reducing our exposure to medical outpatient and Meanwhile, the rest of our NOI has been growing.
So.
We like medical outpatient and there's nothing wrong with the segment.
Great during Covid it held up really well, we actually increased our occupancy in 2020 that being said, we're seeing much lower growth on medical outpatient than we are in and shop and trilogy. So.
It doesn't mean, we won't be buying it in a couple of years or three years, we will see what the market does but today, that's probably a sector that we're reducing our exposure as opposed to increasing it.
And similarly on the other similarly.
Similarly on the other triple net side.
We're not growing.
We're not growing externally right now aside from some select things that trilogy.
So we're not out there looking for portfolios I do know that we have extremely high standards on rent coverage and I don't know.
He would be the most aggressive buyer there may be others that would be willing to live with a lower.
Coverage on those.
Well said.
Got it and then maybe one more housekeeping on maintenance Capex what was it in total for the portfolio in 'twenty three and what should we expect there for 24.
So.
I'd tell you I would direct you to the supplemental.
We've layered in some new information for people to be able to underwrite the kind of maintenance capex, you'll see on each of the segments. We have four segments on three of the segments. We have maintenance Capex on trilogy, which is the IFC on shop and on the outpatient medical.
Bottom line of the top section of page four six and nine.
Youll be able to see what the what the maintenance Capex was for each of those obviously theres no maintenance capex on the Triple net side. If you do spend money you have.
You have a.
Resulting increase in rents.
But I think generally we've been pretty clear first and foremost I would just guide you that it's a very choppy and can even be seasonal thinking about if you're going to.
Repave, a parking lot you can't really do that if there is snow on the ground. So those those things might have to happen in warmer weather same with like a roof replacement and things like that generally speaking we guide people to about 900 to $1000 a foot at trilogy, and or excuse me not a foot a bed and we guide about 800.
<unk> $1000 a bed on our shop portfolio.
And then on the MLP side again, it's heavily dependent on the amount of leasing that we do in any given quarter or year, but ultimately I think $4 a square foot is a pretty good number for us.
Now the numbers bounce around significantly and if you do the math on what it looks like in 2022 2023, there is sort of all over the map, but ultimately long run I believe in the numbers that we've just talked about as far as run rates go a little lower on Mlps. This year, frankly that had to do with sludge switching out.
<unk> if you have an older operator that you discover is excuse me on shop.
And operator that you believe is not necessarily part of your portfolio on an ongoing basis.
Allocate as much capex to those guys and then you wait until you get the new operator in and then they need to get the seat under them and ultimately decide where they want to deploy dollars.
<unk>.
On the shop side, the Capex spend was a little lower in 'twenty three I expect it to get back up to that 800 to 1024, and then on the shop side excuse me on the <unk>.
<unk> integrated senior health campuses.
We spent more this year than that sort of 900 to 1000 and the reason was is a lot of sort of nonrecurring and even some home office spend there.
<unk> had them they bought some new buses for campuses they bought $815000 in ultra Violet disinfecting equipment.
They did a bunch of roof replacements, they even remodel part of their home office. So it's above $1000 a foot for those guys, but but most of it was non recurring I think what youll notice is that our numbers are not contrived, we sort of just take whats the maintenance capex and we put it in there and that is.
The results I think youre going to see a little bit more volatility in those numbers, but still feel comfortable over time with the dollars that I gave you.
Thanks for all the detail I appreciate it.
Yeah.
Once again, if you would like to ask the question simply press Star then the number one on your telephone keypad.
Your next question is from the line of John Pawlowski with Green Street. Please. Please go ahead.
Hi, gentlemen, good morning. Thank.
Thanks for the time, a few questions on MLB portfolio.
So with roughly 25% of your leases expiring this year and next year curious Danny how much occupancy.
Last you expect over the next two years as these leases roll.
So I think in general we're not I mean, we're.
We're expecting a little bit of occupancy loss this year because of known Vacates and the majority of the Vacates that we are seeing is due to hospital consolidation so in years past.
Tenant didn't renew very often is because they were moving into a new newbuild new construction.
And that shifted over the last four or five years and now with the.
With the exposure to health system leasing, which has been increasing as we all know.
The main reason, we see a tenant non renewals because of consolidation. So we have a couple of move outs. This year that we knew about theyre working on re leasing them.
And we are confident that they will get released I mean, theres a lot of activity out there, but between the time to release in the time to get the new tenant in and paying rent you get some downtime. We saw this couple of years ago, as well, where we had some drop in occupancy would be candidate and it's kind of one of the reasons. We had pretty good same store growth the first half of last year.
It's because we had we did some re tenant in 2022, so the only major lease that I know of that.
Significant we do have a lease that expires.
July 31 of next year 2025, it's a sizable lease.
It's the Mercy health system, it's primarily administrative use vague waffle.
Waffled back and forth as to whether they want to stay whether they want to leave the latest we've heard from them is they want to keep part of it.
So I know that on our.
Long term guidance that we provided to the analysts.
Most recently I think we talked I think we had them not necessarily leaving im sorry, not necessarily staying latest information we have from them is they want to keep part of it.
So it remains to be seen but.
We've seen retention typically between 80% to 90% very consistently over the last few years and I don't expect that to change.
Yes, John I'll, just amplify that a little bit we arent, giving guidance specifically on occupancy, but I can tell you that I can see it at 12 31 2023 in the mob space Medical outpatient was 89, 2% I think it's going to show some weakness early in the year when those vacates.
Those vacates, we knew about some of them, we didn't but ultimately I would imagine we're going to grow back pretty close to the end of the year not too far off from where we started the year.
Then that's sort of why we're guiding people down a little bit on the NOI youre going to Youre going.
It takes a little while to build out space. It takes a little time to find the tenant to sign them up.
To get that rent to commence but ultimately it results in a lower NOI, but ultimately I think the occupancy gets pretty close back to where we were to start the year.
And our NOI growth within our medical patient is always traditionally been choppy.
You get.
Our portfolio is small enough to where you have one or two big tenants not renewing and it impacts us.
We're not we don't have that much medical outpatient.
Okay.
I know its far along time off but when you look at those leases do you alluded to that there is some administrators.
Administrative space coming back.
As 2025 from that as best as you can tell right now 2025, another year of kind of zero percent NOI growth before you revert back to 2% to 3% historical norm.
It's really hard to say I mean, I think that I think the historical norm is is indeed, the norm, but it's very hard to predict.
Okay.
As far as which years will be up and which will be down.
Okay.
Can you share what percentage of your MLP leases are backed by investment grade credit.
We.
We don't track it in total you can look on the supplemental on page seven can see that our.
Five largest obviously and we've got their credit rating there, it's not to say that any of the other 79% of our tenants don't have credit ratings, but it's.
It's not enough that it made the top of the list. Yes. If you look at <unk> health, which is our fifth largest because two 2%.
So if you can imagine everybody else is a very small we don't we don't have any large tenants with significant exposure very much very much of a multi tenant portfolio with 90% of our of our space being multi tenant.
Okay, but should we interpret the bulk of that 80% not being investment grade.
I would say, it's a lot of we still have a lot of physicians in the building who.
We've got a lot of health systems, who may or not be may or may not be investment grade.
Okay.
I'm certain there is some in there that are but I wouldn't say the preponderance.
Okay.
Last one for me if you'll humor me. Another question can you just help me think you restructure the dividend before the IPO, but how you thought through the level of dividend why not give yourself more cushion here with at least for this year looks like.
<unk> will be below the level of dividend.
I think that we debated that a lot and.
It just felt it didn't make sense to kind of just a turnaround have to increase it in 2025 I think if you look at the spend.
The additional spend to maintain the dividend for 2024, it wasn't that material.
And.
Very very well a lot of confidence that we will get back to where we need to be in 2025. If that was not the case, we probably would have addressed it but we just didn't feel there was a need to.
Okay. Thanks for all the time.
Thanks.
Your next question is from the line of Barry, Oxford with Colliers. Please go ahead.
Great. Thanks, guys.
Obviously, a lot of my questions have been answered, but when youre looking at the $68 million in dispositions.
Where what property types do you see that kind of coming from that you have kind of earmarked.
<unk>.
It's primarily medical outpatient.
Every once a while we'll sell one.
One off long term care facility, but most of what you've been selling for last year and App has been medical outpatient.
Okay and you wouldn't.
You wouldn't consider selling anything inside trilogy.
We actually occasionally do sell our facility in trilogy.
It's not.
That's something we do regularly but first of all sometimes they will buy an older asset and build a replacement facility. So we will sell the older one.
But I would say not every year, but many years, we'll sell one or two trilogy buildings are typically.
Maybe an older building something they acquired as opposed to purpose built but not necessarily.
So.
Barry Oxford with Colliers. Please go ahead.
It's.
They do have.
Like any other portfolio, it's 125 buildings and we constantly evaluate the properties and if there's one or two that makes sense to dispose of them. Sometimes we will try we will expose some to the market and we may not get the price and we will keep it.
Great. Thanks, guys.
Obviously, a lot of my questions have been answered, but when youre looking at the $68 million in dispositions.
Where what property types do you see that kind of coming from that you've kind of.
Earmarked.
Alright, perfect perfect. Thanks, guys.
Speaker Change: It's primarily medical outpatient.
Speaker Change: We know every once a while we'll sell.
Thanks Barry.
And at this time there are no further questions I will turn the call back to Dani for closing remarks.
Speaker Change: One off long term care facility, but most of them we've been selling for last year in the App has been medical outpatient.
Alright, well. Thank you operator, we appreciate your help.
Speaker Change: Okay and you wouldn't.
Speaker Change: You wouldn't consider selling anything inside trilogy.
Thank you very much to everybody who joined us on the call I can say, we've got a lot of people who joined US can see I don't see exactly how many but I can see it's a long list.
Speaker Change: We actually occasionally do sell a facility in trilogy.
Speaker Change: It's not.
We're very excited this is our first call as a publicly traded REIT and we look forward to many more and we're very excited about the prospects for this year in the next several years. So thanks, everybody have a great weekend.
Speaker Change: That's something we do regularly but first of all sometimes they will buy an older asset and build a replacement facility. So we will sell the older one.
Speaker Change: I would say not every year, but.
Speaker Change: Many years, we'll sell one or two trilogy buildings typically it's maybe an older building something they acquired as opposed to purpose built but not necessarily.
This does conclude the American health care REIT fourth quarter 2023 earnings Conference call. Thank you for your participation you may now disconnect.
Speaker Change: So it's.
Speaker Change: They do have it like.
Speaker Change: Like any other portfolio, it's 125 buildings and we constantly evaluate the properties and if there's one or two that makes sense to dispose of sometimes we'll try it will expose to the market and we may not get the price and we'll keep it.
Speaker Change: Right perfect perfect. Thanks, guys.
Speaker Change: Thanks Barry.
Speaker Change: And at this time there are no further questions I will turn the call back to Dani for closing remarks.
Dani: Alright, well. Thank you operator, we appreciate your help.
Dani: Thank you very much to everybody who joined us on the call I can say, we've got a lot of people who joined US I can see I don't see exactly how many but I can see it's a long list.
Dani: We're very excited this is our first call as a publicly traded REIT and we look forward to many more and we're very excited about the prospects for this year in the next several years. So thanks, everybody have a great weekend.
Speaker Change: This does conclude the American health care REIT fourth quarter 2023 earnings Conference call. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change: Hum.
Speaker Change: This does conclude the Americans.