Q3 2024 National Health Investors Inc Earnings Call
Thank you.
Speaker Change: Greetings, and welcome to the National Health Investors, third quarter 2024 earnings webcast and conference call.
Speaker Change: At this time, all participants are on a listen-only mode. On a question and answer session, we'll follow the formal presentation. If any one should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker Change: Please note this conference is being recorded.
Speaker Change: I will now turn the conference over to your host, Dana Hambly, Vice President of Finance and Investor Relations. Sir, the floor is yours.
Dana Hambly: Thank you and welcome to the National Health Investors Conference Call to review results of the third quarter of 2024.
Speaker Change: On the call today are Eric Mendelson, President and CEO, Kevin Pascoe, Chief Investment Officer, John Spaid, Chief Financial Officer, and David Travis, Chief Accounting Officer. The results, as well as notice of the accessibility of this conference call, were released after the market closed yesterday in a press release that's been covered by the financial media.
Any statements in this conference call which are not historical facts are forward-looking statements. NHI cautions investors that any forward-looking statements may involve risks or uncertainties and are not guarantees of future performance.
Speaker Change: All forward-looking statements represent NHI's judgment as of the date of this conference call.
Speaker Change: Investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-K for the year ended December 31, 2023, and Form 10-Q for the quarter ended September 30, 2024.
Speaker Change: Copies of these filings are available on the SEC's website at sec.gov or on NHI's website at nhireet.com.
In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in NHI's earnings release and related tables and schedules, which have been furnished on Form 8K to the SEC.
Speaker Change: Listeners are encouraged to review those reconciliations provided in the earnings release together with all other information provided in that release. I'll now turn the call over to our CEO, Eric Mendelsohn.
Eric Mendelsohn: Thank you, Dana. Hello, and thanks to everyone for joining us today.
Eric Mendelsohn: The third quarter results largely reflected continued strong fundamentals through much of the portfolio with occupancy and EBITDARM coverage improving sequentially from the second quarter across all our major asset classes.
Eric Mendelsohn: Our shop occupancy continues to show strong growth, and at 88.6% for the quarter, is approaching levels at which we believe we can start to drive more rate growth with significant margin upside likely to follow.
Eric Mendelsohn: As Kevin will discuss in more detail, Senior Living Management, one of our cash basis tenants notified us late in September of their inability to pay their lease and interest obligations.
Eric Mendelsohn: I'm proud of our team's quick response in securing new management for each of the lease properties and transitioning within days to ensure no adverse impacts to the residents.
Eric Mendelsohn: On a more positive note, we're very excited about recent investment activity in our growing pipeline. Year-to-date, we've closed on investments totaling over $205 million at an average initial yield of approximately 8.4%.
Eric Mendelsohn: This includes $121 million acquisition of the Spring Arbor portfolio of 10 senior living communities in North Carolina, our largest acquisition since 2020.
Speaker Change: We have sourced opportunities of more than $1.9 billion of this amount. We have board-approved signed LOI investment opportunities of $59.8 million that we expect to close this year and or early next year.
Eric Mendelsohn: In addition, we're evaluating an incremental pipeline of approximately $350 million.
Speaker Change: We are also pursuing several large portfolios, including shop and skilled nursing deals, which are not included in our pipeline numbers.
Speaker Change: Frankly, I've not seen this level of actionable investment opportunities in my entire career. And while nobody can ever be certain how long this window stays open, I see several factors supporting years of exceptional growth.
Speaker Change: Just a few of these factors include, one, our cost of capital has improved significantly over the last 12 months as industry fundamentals improved and the noise from the multi-year portfolio optimization has been reduced. As evidenced,
Speaker Change: We completed the successful offering of 2.76 million shares on a forward basis in a deal that was significantly oversubscribed and allowed us to upsize the offering by 20%.
Speaker Change: Two, traditional capital providers to the senior housing sector include banks and private equity have either scaled back their exposure or have exited the industry completely.
Speaker Change: Given the cost of capital advantage and ready access to debt and equity
Speaker Change: And three, the industry has tremendous tailwinds as inventory growth at approximately 1% is at historic lows and new starts are at the lowest level since 2010.
Speaker Change: and, of course, the major demographic tailwind currently underway.
Speaker Change: We're as excited about the future as we've ever been. Our growth profile is multifaceted both internally and externally and is supported by a strong financial position. We believe that we have positioned the company to succeed through all stages of the business cycle and have added depth and preparation for expanding the shop platform.
Speaker Change: As I said this last quarter, and it remains the case, that we are convinced that we are in the early days of exceptional growth for many years to come.
Speaker Change: Before turning the call over, I have a couple of items to address.
Speaker Change: First, I want to acknowledge all of the operators and their employees that were impacted by the recent hurricanes. Your efforts to keep residents and patients safe have been nothing short of heroic, and we deeply thank you.
Speaker Change: Second, as many of you have seen, we recently filed an 8k announcing that our chairman, Andy Adams, will be retiring from his role effective December 31st.
Speaker Change: Andy has been with us from the beginning, serving as the founding chairman and CEO of NHI from its inception in 1991.
Speaker Change: He is a visionary pioneer in the industry, and we are incredibly grateful for his leadership and mentorship. He will be missed, but we look forward to staying in touch and wish him the very best in a long and productive retirement.
Speaker Change: I'll now turn the call over to Kevin to provide more details on our operations. Kevin.
Kevin: Thank you, Eric. I'll focus my comments on acquisitions and the pipeline, as well as an asset management overview of our major asset classes.
Kevin Pascoe: Since our last call in August, we have closed $149 million of investments in two deals. In August, we originated a construction loan to fund up to $27.7 million for the development of an inpatient rehab facility in Lake City, Florida.
Kevin: This is a four-year loan with two one-year extension options and carries a rate of nine percent.
Speaker Change: The Loan Party is a new relationship for NHI, but a group that has plenty of experience developing health care properties with over $2 billion in projects completed.
Speaker Change: NHI has a purchase option on the property after certain licensing and coverage requirements have been met.
Speaker Change: We also recently announced the acquisition of a 10-property portfolio of senior housing communities in North Carolina for $121.3 million, including transaction costs, at an initial yield of 8.23% with 2% fixed escalators.
Speaker Change: The properties continue to be managed by Spring Arbor, which is also a new relationship for NHI.
Speaker Change: The coverage is well above our average coverage for needs-driven properties and the lease includes a ten million dollar earn out incentive which will be added to the base if and when it is funded.
Speaker Change: The cupboard is still full and we have $59.8 million in board-approved deals with an average yield of 8.8%.
Speaker Change: We are also evaluating an actionable pipeline of 350 million investments which have a reasonable chance of closing within the next 12 months. Not included in the pipeline are multiple portfolio deals including shop and skilled nursing that are in various stages of negotiations.
Speaker Change: Turning to asset management, with the exception of SLM, we had another good quarter with improving EBITDARM coverage in occupancy, deferral collections, and shop growth.
Speaker Change: The need-driven operators, again, had positive coverage trends with Epidarm at 1.41 times, representing the 10th straight period of sequential growth.
Speaker Change: The improvement was driven primarily by Bigford at 1.72 times.
Speaker Change: Adjusting for the April 1st rent increase, the Bigford coverage would have been a healthy 1.61 times, up from 1.45 times when we reported in the second quarter.
Speaker Change: [inaudible]
Speaker Change: Bigford's quarterly occupancy improved by 80 basis points sequentially to 86.2%. They repaid $1.1 million in deferrals, and they recently implemented a mid-single-digit price increase. All told, we're very happy with the operational focus and resulting performance.
Speaker Change: The need-driven coverage excluding VICTRA was flat at 1.15 times. As we noted last quarter, this was the function of a change in assets and we see upside potential in the recently added properties.
Speaker Change: Regarding SLM, this is an operator we have been reducing our exposure to for multiple years, as we had already sold seven properties since 2021, leaving four remaining leased properties and two loans.
Speaker Change: Prior to their action to cease payments to NHI, we were in the process of selling another underperforming property as well as transitioning a property to a new operator.
Speaker Change: The property held for sale is expected to close later this year, or early next, with NHI providing seller financing.
Speaker Change: The transition to property occurred as expected to the William James Group on October 1st. The two other leased properties have healthy EPA-DARM coverage, and we are pleased to have transitioned them to a more capable operator.
Speaker Change: We are evaluating multiple scenarios for two loans, and we'll provide more details when available.
Speaker Change: We expect to incur some transition expenses in 2024, but should start to recapture a significant portion of the lost NOI next year.
Speaker Change: In November, and separate from SLM, we transitioned a second senior living community to William James Group. This is a new relationship for NHI, but we have worked closely with the management team in the past and are already looking at other opportunities to grow this group.
Speaker Change: Our entrance fee and skilled nursing portfolios, which together generate approximately 58% of our NOI, continue to show great performance.
Speaker Change: The discretionary senior housing portfolio, which includes our entrance-free portfolio, had coverage of 1.64 times compared to 1.6 times in the sequential period.
Speaker Change: The SNF portfolio reported solid coverage at 3.04 times which improved sequentially from 2.97 times. This includes an improvement in NHC's fixed charge coverage ratio at 4.12 times from 3.96 times.
Speaker Change: Lastly, in shop, momentum continues to build throughout the portfolio.
Speaker Change: Third quarter NOI increased 30.4% year-over-year and 2.5% sequentially to $3 million.
Speaker Change: Resident fees increased by 11.4 percent year-over-year driven by occupancy improvement to 88.6 percent from 79 percent and contributed to 320 basis points of margin expansion to 22 percent.
Speaker Change: Compared to the second quarter of 2024, occupancy improved by 160 basis points while the margin declined slightly by 10 basis points.
Speaker Change: The market was below our expectations, but occupancy continued to improve throughout the third quarter, ending on a high note at 89.1% in September.
Speaker Change: As occupancy gets closer to 90%, we expect to start reducing move-in incentives, which should lead to an improvement in margin given the significant operating leverage in the independent living model.
Speaker Change: We are starting to see evidence of this in particular in buildings that have reached or clipped the 90% occupancy mark.
Speaker Change: We've tightened our current guidance for annual shop NOI growth to the high end of the range from 25 to 30 percent to 28 to 30 percent.
Speaker Change: I'll now turn the call over to John to discuss our financial results and guidance. John?
John Spaid: Thank you, Kevin, and hello, everyone. I'll talk about our recent capital activity in a moment, but first, our results. Our net income for diluted common share for the quarter ended September 30, 2024, was 65 cents compared to 68 cents for the same period last year.
Speaker Change: Our NAREAP and normalized FFO results for diluted common share decreased 4.6% to $1.03 for the quarter ended September 30 compared to the prior year's third quarter.
Speaker Change: FAT for the quarter increased 2.5% to $49.4 million from $48.2 million in the prior year's third quarter.
Speaker Change: Our FAD results for the 9-month period ended September 30, 2024 are up 8.3% compared to the same period last year.
Speaker Change: Compared to the second quarter in 2024, cash rent and interest income recognized for the third quarter was down approximately $2.9 million.
Speaker Change: The decline was primarily due to a non-recurring $2.5 million deferral repayment made last quarter by a cash basis tenant, as well as $1 million in lower lease and interest payments from SLM.
Speaker Change: offset by new transaction rent and interest income of $600,000.
Speaker Change: Normalized FFO was sequentially down $5.7 million due to the 2.9 million sequential reduction in cash revenue and also the $3 million in sequentially higher credit loss expense net of other changes totaling approximately $200,000.
Speaker Change: and Hawaii from our shop portfolio increased 2.5% for the third quarter compared to the second quarter and is a 30.4% improvement compared to the prior year quarter.
Speaker Change: Year-to-date, SHOP NOI has increased by 40.9%.
Speaker Change: Net FAD contribution after recurring capital expenditures and other shop adjustments was sequentially down 2.6% for the third quarter.
Speaker Change: Let me turn to our recent capital activity.
Speaker Change: In mid-August, we completed an overnight equity offering structured with a forward equity component.
Speaker Change: We're very pleased with the investor participation.
Speaker Change: At execution, we escrowed approximately $189 million in proceeds, which, net of customary forward adjustments, we can access in exchange for 2.76 million common NHI shares.
Speaker Change: Also in October, we closed on the amendment and restatement of our $700 million revolving credit facility.
Speaker Change: which reset the maturity date to October 2028 and provides for two six-month options to extend.
Speaker Change: This transaction improved our weighted average debt maturities to 3.7 years at the end of October.
Speaker Change: We also have the right to extend our $200 million term loan due June 2025, an additional year at our option.
Speaker Change: Since our revolvers are primary source of liquidity and we're always mindful of our investment-grade liquidity requirements, we'll be more closely monitoring the long-term bond market in 2025.
Speaker Change: At the end of October, we had $350 million drawn on the revolver.
Speaker Change: Our balance sheet ended the quarter in great shape. Our net bet to adjusted EBITDA ratio was 4.4 times, well within our stated 4 to 5 times leverage policy.
Speaker Change: We ended the quarter with $500 million in available ATM capacity. And as I mentioned, we continue to have the remaining Equity Forward proceeds available to us.
Speaker Change: We were repaid a $75 million private placement loan due at the end of September with revolver proceeds and as a result, our variable interest rate debt stood at approximately 45% at September 3.
Speaker Change: As we announced last night, our Board of Directors declared a 90 cent per share dividend for shareholders of record December 31st, 2024 and payable on January 29th, 2025.
Speaker Change: So let me now turn to our full year 2024 guidance.
Speaker Change: Our updated guidance today is compared to our August 2024 full year guidance, reflects midpoints for NAREAD FFO and normalized FFO per diluted common share of $4.40 and $4.44 respectively.
Speaker Change: FAD increased at the midpoint.
Speaker Change: $1.2 million in weighted average Duluth shares reflects the impacts from the shares issued in October for the equity forward proceeds received.
Speaker Change: So once again, thank you all for joining our call today. That concludes our prepared remarks. So with that, operator, please open the lines for questions.
Speaker Change: Thank you. At this time we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question key.
Speaker Change: And you may press star 2 if you would like to remove your question.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment please, while we poll for questions.
Speaker Change: Thank you. Our first question is coming from Juan Salabria with BMO. Your line is live.
Speaker Change: Hi, this is Robin Hain, and I'm sitting in for Juan.
Robin Hain: Just curious on PACS, what is your preliminary thoughts around PACS today and can you comment on NHI's coverage post the prestige transition?
Robin Hain: Good morning, this is Kevin. As it relates to PACS, you know, they're a smaller customer of ours. They're less than three percent and of which about half of the revenue we receive is related to the PACS.
Speaker Change: Furthermore, as we look at
Speaker Change: The underlying performance of the properties, our coverage is over two times on the dorm level on those buildings and that's based on
Robin Hain: The prior operator, as you probably know, these recently transitioned, so we don't have a full suite of financials from them, but even through our underwriting, we weren't seeing any massive revenue changes or big changes to the existing business as related.
Speaker Change: to our communities. So, you know, currently we see those as stable. We need to get some more information. We'll definitely have some more questions around, you know, some of the information that's come out. We have some, we already had some meetings.
Speaker Change: plan with them coming up in the next couple of weeks, so we'll be interested to find out more from them, but as it relates to our portfolio, you know, we haven't seen anything that would
Speaker Change: cause concern to date, but we'll definitely be monitoring it closely.
Speaker Change: And for your portfolio, do you see PACS having any outsized or unusual skilled mixed revenue versus the peers in your portfolio?
Speaker Change: Again, it's been a recent transition so we don't have a long run rate on the current financials from them. You know it's probably a...
Speaker Change: a month or two of experience, really, at this point. So, so far, no. And again, through underwriting, there wasn't any outsized or huge discrepancies on expected payments or payors or anything like that that was in the numbers.
Speaker Change: to us, so we don't have anything on that end to dig more into just yet, but again, we'll be focused on it.
Speaker Change: Got it. Just wanted to touch on the pipeline as well. What are the expected yields here? What's the mix between C-Simple and how much is shop related?
Speaker Change: So on the pipeline, we're looking at a range of investment opportunities, some of it's debt, some of it's triple net lease, some of it's shop, as we disclosed. So it's really going to depend on the mix of deals that we end up securing.
Speaker Change: Generally speaking, you know, what we've seen is 8% or more from us. We're still looking at similar yields in that range again.
Speaker Change: risk-based and product-based. So that's still going to be our target as we start to do more shop and we enter into more of a competitive market. You know, maybe some of those yields get compressed a bit, but you know, still feel good about where we're at and the investments we have in front of us.
Speaker Change: And last one for me, on the Spring Arbor portfolio, I can stay sharing, can you comment on the assets REVPAR and the portfolio's break-even occupancy, just given the sizes are smaller sub-60 units in most cases?
Speaker Change: Yeah, so we've we went to each of the the buildings and have done a fair amount of underwriting on each one You know that some of them are a little more in secondary markets some or more primary markets. So there's going to be a range of
Speaker Change: revenue and revenue per resident in each one, depending on
Speaker Change: the local market fundamentals. We see them as having strong We see them as having strong rep for their, again for their local markets. Some of them do much better, particularly if you're looking at, you know, the Raleigh type Raleigh area markets, which we would expect.
Speaker Change: They are, as you mentioned, a little bit on the smaller side. There's some that are a little bit bigger, again, in some of the bigger markets.
Speaker Change: We generally look at break-even occupancy on buildings of this size and call it the
Speaker Change: 80-85% range, they're trending ahead of that and with room to run, which is also why we offered a earn-out, because we think that there's value creation that they can continue on this portfolio.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is coming from Rich Anderson with Wedbush. Your line is live.
Rich Anderson: Hey, thanks. Good morning. So on SLM
Rich Anderson: Just so I got this right, so three are transitioned, one sold, two loans, TBD on that. They were paying you $3.4 million in rent, $1.6 million in interest. I think I have that right. What's the expectation in terms of recovery of that?
Rich Anderson: whatever that is, six or five million bucks of NOI in 2025. How would you describe your expectation there and will the new three transition to properties be on a cash basis as well for the interim period?
Rich Anderson: Well, Rich, this is Kevin. I'll address kind of the operational piece in this.
Speaker Change: and I can let John or David weigh in on how we treat that from an accounting perspective. But what I'm proposing to our operators be that we're getting back to normal rent levels or income levels.
Speaker Change: in the second half of 2025. A lot of that depends on how fast we move on this. I think we, as it relates to the loans, we have a range of options that we can do that include taking back the properties, foreclosing on some but not all,
Rich Anderson: selling the loans, you know, allowing for a sale process to happen. So that's all stuff that we're working on right now. So we'll need a little bit of time to sort through it and what the best option for NHI is going to be.
Speaker Change: Thank you.
Speaker Change: I think that there's value in these properties and it's something that we're going to make sure we move quickly but take the appropriate amount of time to figure out whether or not we're just going to sell or try and move on with all or a portion of the communities that are on the loan.
Speaker Change: On the rent side, two of the buildings were cash flowing. We expect those to come back online, so to speak, sooner rather than later. I'd say first part of 2025 and paying something closer to full rent.
Speaker Change: That's also something that we're working through with them now, making sure that we have CapEx scheduled for the buildings and are getting to where we're not putting them in a...
Rich Anderson: a negative position with current rent amounts, so we're just mindful of that until we can get them abridged to a stabilized run rate on NOI. But two of those are doing well. And then the other two that we transitioned, one we expect it to sell, so then we'll be.
Rich Anderson: accruing interest of current pay on that one bid.
Rich Anderson: does sell, which we would expect in the next 30 to 60 days.
Rich Anderson: And then the last one, one other asset in Georgia that we transitioned was already planned to transition as part of our plan to the Wayne James Group.
Rich Anderson: They have a turnaround track record. We did give them...
Rich Anderson: a couple quarters of free rent in order to get the building stabilized. We have, they have adequate working capital to get the building back online. So if there's a hole, that's really the one that we're focused on and why I wouldn't come back.
Rich Anderson: quicker in 2025, so it's really just the one building. That said, I think we've got a good management team in place. They have a good track record on getting buildings turned back around, which is why we put them in there. I think that's kind of the...
Rich Anderson: A quick overview of each one.
Speaker Change: Thank you.
Speaker Change: On the two that are cash flowing, why is there a free rent offer there as well to spike that? Or why is it taking time into 2025 to start seeing cash flow from those two?
Speaker Change: Well, I wouldn't characterize it as free rent, but it's a minimal to moderate amount of rent. The reason for that is a couple things. We took these buildings very quickly from the previous operator. We got the transition done in less than two weeks.
Rich Anderson: In doing so, there's PTO that has to be paid out, there's payrolls that have to be made, there's deposits that have to be made for your utilities, there's CapEx for certain immediate repair items that the prior operator wasn't mining the store on. So we're allowing them time to make sure that.
Rich Anderson: They have...
Rich Anderson: and I'm going to go over a little bit about the stable transition before we start charging the rent. They have made some very small rent amounts to date. I expect something more over the next, you know, really even 30 days
Rich Anderson: a fixed rent stream. I wanted to make sure that we understood where they were
Rich Anderson: sized it appropriately. Okay.
Speaker Change: Any timeline of when you think you might be announcing who the new chairman will be?
Speaker Change: I'll take that one. This is Eric. Hi Rich.
Rich Anderson: Well, it will probably be after Andy's retirement the end of the year so stay tuned
Rich Anderson: Okay, and then last for me, you know, with the election last night...
Rich Anderson: You know health care generally down any concerns from your seat in terms of potential Changes to the ACA or anything that could come back and bite your business Specifically or do you feel like you're somewhat insulated at this point?
Speaker Change: It's still early days, but there's definitely some pluses and some minuses. You know, there were some...
Speaker Change: Elizabeth Warren, Senator Markey, letters circulating that were pretty threatening to our industry so I'm assuming the impacts of those will lessen.
Rich Anderson: And if you recall, the head of CMS under the previous administration was Seema. She was actually very industry friendly. So I'm cautiously optimistic.
Speaker Change: Okay. And I guess one last thing. How far along are you in the discussions with NHC? Is it already on the table in terms of talking about that expiration?
Speaker Change: It's still also too early to talk about.
Speaker Change: We have discussions with them.
Speaker Change: periodically. As you know, we engage Blueprint to help advise us about marketability and market
Speaker Change: Pricing and Dynamics, so the discussions are ongoing.
Speaker Change: Okay, wonderful. Thanks very much. Thanks, Rich.
Speaker Change: Thank you. Our next question is coming from Joshua Denneline with Bank of America. Your line is live.
Speaker Change: Hi, this is Farrell Granath on behalf of Josh Dennerlein. I was curious, in terms of your same-store shop occupancy having a sizable sequential jump, how are you thinking about occupancy levels going forward and your ability to push rates?
Kevin Pascoe: Sure, this is Kevin.
Kevin Pascoe: Again, the goal here is really to get to 90-plus percent. That's really been the push. We've held revenue fairly flat from a REVCOR standpoint.
Speaker Change: to make sure we get that occupancy and then using incentives strategically to get there. We've seen almost half of the buildings get to 90% so we should see those in
Speaker Change: Thank you.
Speaker Change: Those incentives start to burn off, the short-term ones, start to be lessened as particularly those communities stabilize. So we think we should see some additional margin expansion as it relates to those buildings. A lot of those have really gotten there in the last, call it 30 to 60 days, so
Speaker Change: We want to make sure they're staying there before we really take our foot off the gas in terms of the incentives, but
Speaker Change: Again, I think we're on a pretty good run rate. The operators are doing well with getting the occupancy where we want it to go. Frankly, it's taking us a little longer than we would like to seem, but we're getting there. From there, what are we going to see? We're looking at a mid-single digit.
Speaker Change: revenue increase as it relates to street rates this year and then as we start to continue to see occupancy stabilize we should see that flow through to the bottom line as well.
Speaker Change: Hey guys, it's Josh with Feral. I had another question too, just like how should we think about labor costs across like the Smith and senior housing industries, maybe under the new administration. I'm assuming a lot of the jobs are kind of...
Speaker Change: lower income, maybe some of the policies that could be enacted, like how do we think about that versus maybe like the better regulatory environment from a SNF perspective?
Speaker Change: Well this is Kevin again. From just a straight labor standpoint and you know just across the asset classes, we had seen a stabilization on the growth rate of labor expense. So I don't think we're looking at a retrenchment of employment rates.
Speaker Change: I think, you know, we're looking at.
Speaker Change: how that stabilizes going into the future. As it relates to SNF, we do have the minimum staffing requirement that will be out there. You know, maybe that gets modified or goes away. So that could be a good thing, particularly on the skill side, on the senior housing and...
Speaker Change: As we're looking at shop, you know, labor's been pretty steady there. Again, I don't see employment, the pay rate's going down, but we don't see them spiking and would like to think that that will continue.
Speaker Change: Well, thanks for the time, guys.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is coming from Amateo Acusana with Deutsche Bank. Your line is live.
Amateo Acusana: Good morning, everyone. Congrats on the solid quarter. I wanted to talk about the board a little bit. With Andy retiring, does that mean there's another opening for another board member?
Speaker Change: And could we also get an update on the search for, you know, the current independent board member that's also ongoing?
Eric: Hey, this is Eric.
Speaker Change: and John Spaid. Thank you.
Speaker Change: Right, as you know, on our supplemental proxy last year,
Speaker Change: shareholders will have a chance to to vote on them. Whether or not Andy's
Speaker Change: Seat gets replaced is a good question and one that that hasn't been discussed yet
Speaker Change: As you know, the
Speaker Change: The new board member was an addition to an eight-person board, making it nine. So we'll probably...
Speaker Change: Wait and see on that one
Speaker Change: Okay, that's helpful. And then just sticking to the theme of the election, anything at the state level through this election cycle that you guys
Speaker Change: Keeping an eye on that we should be we should have been aware of
Speaker Change: I know we've kind of talked at the federal level about ACA and minimum staffing, but anything at the state level that was on your radar?
Speaker Change: Not a given that these payments will continue from year to year, so it's very local legislature driven and very lobbyist driven. So those are some things that we're watching closely.
Speaker Change: Gotcha. All right, thank you.
Speaker Change: Thank you, Tyler.
Speaker Change: Thank you. Our next question is coming from Austin Vorschmidt with Key Bank Capital Markets. Your line is live.
Austin Vorschmidt: Thank you and good morning everybody. Do any of the skilled nursing or other investments that you discussed in the prepared remarks either in the 350 million of an investment pipeline or beyond that amount include any deals with PACS?
Kevin Pascoe: This is Kevin. Not currently, no. We're just getting to know them as a new customer in our portfolio, so we haven't talked in detail of any new ventures just yet.
Speaker Change: Thank you.
Austin Vorschmidt: And then Eric.
Eric: You know, your prepared remarks, I mean, you remain upbeat about the prospect for new investments. I think last quarter you had referenced the funnel of $1.8 billion. So I guess, you know, how quickly are you able to close the current pipeline, you know, backfill it? And as we think about the right pace of investments, I guess, is there any need to add additional overhead at this time?
Speaker Change: Good question. I've always said that a good annual run rate for us is between 2 and 400 million. I would consider this year a partial year. We're at 200 million and we'll probably squeeze in a
Speaker Change: 2025, either first or second quarter.
Speaker Change: timing thing. You know as you know especially with senior housing these are licensed buildings and a lot of the states take a long time to to do their inspections and then issue licenses to the new operators.
Speaker Change: Do you think that there's a possibility that you could start to see that investment pace ramp? I mean, we've seen some peers really kind of exceed that annual amount pretty significantly And I'm just wondering if you feel like the the the opportunity is there to even exceed that amount
Austin Vorschmidt: Love to work.
Austin Vorschmidt: You know frankly a lot of us still have
Speaker Change: new muscles that haven't been used for a while. You asked about overhead as well. We did recently hire a senior vice president of legal affairs. So we are beefing up.
Austin Vorschmidt: are capability in terms of staffing and closings.
Speaker Change: helpful and then just last one for me on shop I mean guidance you know the updated guidance implies fairly significant you know moderation and year-over-year growth in the fourth quarter but
Speaker Change: You have seen some recent momentum, as you highlighted, in occupancy and see more upbeat about your ability to push on rate.
Speaker Change: I guess, how do we kind of think about, you know, the cadence and NOI growth? Should we expect some level of this deceleration into year-end and then a re-acceleration from there? I guess, how quickly do you think that, you know, you can implement rate increases and really see, you know...
Speaker Change: re-acceleration in NOI.
Speaker Change: Thanks
Speaker Change: nearly half of them are there but again it's getting to that 90% mark and making sure that we can stop using the incentives before we start to forecast that there's going to be
Speaker Change: additional growth. We expect to see that fall to the bottom line, you know, I think it's going to be, we're looking at that being kind of a
Speaker Change: early to mid 2025 but you know it could if we get through winter and we're able to hold occupancy and have to and not use incentives to do it there's a chance we see that sooner but we don't want to forecast that you know it happens until we start to to see it where we want it to be.
Speaker Change: Thanks for the time.
Speaker Change: Thank you.
Speaker Change: Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your telephone keypad.
Speaker Change: Our next question is coming from John Kilichowski with Wells Fargo. Your line is live.
John Kilichowski: Thank you. If we could start back on shop, you know, I know we were just discussing this and Kevin went through in the opening remarks but as we're thinking about REV4 and I understand that we're using incentives to drive occupancy growth, but
Speaker Change: Based on what your peers are saying, the operating leverage of the business sort of accelerating past call it low 80s occupancy
Speaker Change: What's the difference there when I think about your properties versus theirs in terms of why you need to pursue this strategy? Or is this purely just a difference in strategy that you think will help you get to that occupancy number that you need to be at and then allow you to really drive rent growth? I'm just curious if residents were not receptive to it and it's forced you to pursue this policy or if this is something that just made the most sense that you've run with.
Speaker Change: Well, I think it's...
Speaker Change: a combination of a couple things. One, I just want to make sure we're talking about the same product type, you know, this being not only an independent model, but it's...
Speaker Change: a mid-price point model.
Speaker Change: So something where it's a price-sensitive customer anyway. Furthermore, we chose the strategy of using price to get full, and we've stuck to it. Because we have...
Speaker Change: Could we have played with pricing along the way to see if it would test out a little bit sooner? Perhaps, but changing course midstream just didn't make sense to us when we were starting to see the acceleration on occupancy.
Speaker Change: One thing I'll remind you of is the previous operator left us in a trough where we picked up occupancy and operations, and we had to climb out of it and try and do so on an expedited basis. So that's one big reason why we did it.
Speaker Change: It's stuck to this, you know, use pricing as our mode to get to where we want to go on offer.
Speaker Change: Thank you. Bye.
Speaker Change: Got it. And then on the, I think we discussed this last time, but length of stay had been shortening. Are you still seeing that? And is that still part of the equation here that's sort of limiting REV-4? And maybe what do you think changes that or what's driving that?
Speaker Change: length of stay in the broader industry. Under prior management, you know, two before Atrium really is under the holiday days, they had a longer length of stay than we're seeing now, but I think that's a fundamental shift that we've seen across property types.
Speaker Change: We started to see it kick down anyway, and then coming out of the pandemic, it's really shifted on both.
Speaker Change: and both independent and assisted.
Speaker Change: So, they're holding server, but we're seeing that stay fairly steady now, but again, just below where we were. So, that's also one reason why we want to make sure we have occupancy and a cadence of move-ins to avoid.
Speaker Change: We're holding at that 90% level before we pull back too much from an incentive standpoint. So, it's related to our decision on pricing. You know, definitely, there's a lot more churn than what we were seeing before, but I think that's just where we're at in the industry.
Speaker Change: Got it. And then maybe just one on the election, you know, with, given your, your SNF exposure, Medicare Advantage, do you think that a Republican sweep does anything to sort of expand that mix within your exposure there? Or do you think that just keeps it from maybe shrinking if there were a Democrat in office? Curious how you think that impacts you there.
Speaker Change: Thank you.
Speaker Change: I'll take that one. As I was saying earlier,
Speaker Change: The only read-through we have on that is the previous administration had a very capable head of CMS, Seema was her name, and I was particularly impressed with the rate increases and the regulatory climate, so I'm cautiously optimistic that there will be someone similar to her in the new administration.
Speaker Change: All right, thank you. Thank you.
Speaker Change: Thank you ladies and gentlemen. As we have no further questions in queue at this time, I'd like to turn the call back over to management for closing remarks.
Speaker Change: Thanks everyone for attending and for your time and attention today. And we'll look forward to seeing you at NARIT or some other investor conference.