Q3 2024 American Healthcare REIT Inc Earnings Call
Thank you for standing by. My name is Brianna, and I will be your conference operator today. At this time, I'd like to welcome everyone to the American Healthcare Reap 3rd Quarter 2024 Earnings Conference Call.
Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, simply press star, then the number 1 on your telephone keypad. To withdraw your question, press star 1 again.
Speaker Change: I will now turn the call over to Alan Peterson, Vice President of Investor Relations and Finance. Please go ahead, sir.
Alan Peterson: Good morning. Thank you for joining us for American Healthcare REIT's third quarter 2024 earnings conference call. With me today are Danny Prosky, President and CEO, Gabriel Willhite, Chief Operating Officer, Stefano, Chief Investment Officer, and Brian Peay, Chief Financial Officer.
Alan Peterson: On today's call, Danny, Gabe, Stefan, and Brian will provide high-level commentary discussing our operational results, financial position, and other recent news relating to American Healthcare REIT. Following these remarks, we will conduct a question-and-answer session.
Please be advised that this call will include forward-looking statements.
Alan Peterson: All statements made during this call, other than statements of historical facts, 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.
Alan Peterson: Therefore, you should exercise caution in interpreting and relying on them. I refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results, financial condition, and prospects.
Alan Peterson: All forward-looking statements speak only as of today, November 13, 2024, or such other dates as may otherwise be specified. 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.
Alan Peterson: During the call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating the company's operating performance.
Alan Peterson: These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.
Alan Peterson: Reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable financial measures calculated in accordance with GAAP are included in our earnings release. Supplemental information package and our filings with the SEC.
Speaker Change: You can find these documents as well as an audio webcast replay of this conference call on the investor relations section of our website at www.americanhealthcareread.com. With that, I will turn the call over to our President and CEO, Danny Prosky.
Danny Prosky: Thank you, Alan, and good morning, everyone. We appreciate you joining us today on the call.
Danny Prosky: During the third quarter of 2024, we successfully executed on several key initiatives that have helped to set up American healthcare rate for continued growth for both this year and future years.
Danny Prosky: On the operations side, we continue to position the rink to capture the strong demand for our real estate portfolio.
Danny Prosky: Our operations strategy utilizes a hands-on asset management approach, which continues to drive outsized NOI growth, particularly within our managed segments, comprised of our integrated senior health campuses and our shop portfolios.
Danny Prosky: Most notably, on the capital allocation front, we completed the acquisition of the remaining 24% minority interest in Trilogy, for cash consideration of approximately $258 million, plus the assumption of pro rata liabilities.
Danny Prosky: As the sole owner of Trilogy, we believe we will be able to better optimize capital allocation and pursue development of purpose-built facilities that serve the growing healthcare needs in the communities where our properties operate.
Danny Prosky: For example, Trilogy this year, either through our direct investment or our development joint venture, has developed and opened four new campuses and completed three expansion projects, which will support earnings growth beyond 2024.
Danny Prosky: We believe that at Trilogy, we will have consistent external growth opportunities every year.
Danny Prosky: Without the complexities of having a partner in our trilogy investment, we expect to be able to increase our pipeline of growth opportunities and respond appropriately to our cost of capital and return requirements.
Speaker Change: We are excited to enter this next chapter alongside Trilogy Management Services as our operating partner to deliver high quality care outcomes to residents and strong performance for AHR stockholders.
Speaker Change: We completed the acquisition of Trilogy using proceeds from our September follow-on public comment stock offering, which raised approximately $471.2 million of gross proceeds.
Speaker Change: and also enable us to pay down approximately $194 million on our lines of credit, further improving our balance sheet.
Speaker Change: We expect this enhanced financial position to provide us further flexibility and capacity to pursue external growth.
Speaker Change: Currently, we see robust opportunity to grow our managed portfolio segments given the strong return profile for investments made at Trilogy and within our shop operators.
Speaker Change: Year-to-date, we've been able to close over $650 million of investments, inclusive of our Trilogy Minority Interest Acquisition, lease buyouts, and shop acquisitions.
Speaker Change: and we expect to be able to do more to the extent our cost of capital allows.
Speaker Change: Stefan will discuss some recent acquisitions we've executed in our shop segment and the landscape for future opportunities later in the call.
Speaker Change: As a result of the strong organic growth in our portfolio and delivering on accretive transactions this quarter, we are once again increasing our same-store NOI growth and normalized funds from operations guidance for the full year 2024.
Speaker Change: Brian will provide further details on our guidance during his remarks.
Speaker Change: I'd like to once again take a moment and thank the entire AHR team, our Board of Directors, and our operating partners for not just driving execution and performance during the third quarter, but also for the continued focus on patient care, which is our primary mission here at AHR.
Speaker Change: Without them, we would not have been able to complete this transformational quarter for the REIT, and I am excited to unlock value beyond what we've delivered so far this year.
Speaker Change: We believe that we are well positioned for sustainable growth, executing on the foundational operating strategies that have supported our strong performance thus far, and are further excited to unlock opportunities to grow our portfolio alongside our trusted regional partners.
Speaker Change: With that, I'll hand it over to Gabe to discuss operational highlights in more detail.
Gabe: Thanks, Danny. Our operational performance in Q3 reflects the strength of our diversified portfolio and the continued robust demand for healthcare real estate.
Gabe: And that's especially true in the senior housing and care space.
Gabe: Total portfolio same-store NOI grew by 17% year-over-year in the third quarter compared to the third quarter of last year, with another quarter of very strong performance from our managed portfolio segments, which now accounts for approximately 67% of our cash NOI.
Gabe: In our ISHC or Trilogy segment, we achieved 22.6% year-over-year same-store NOI growth in the third quarter of 2024 compared to the same period in 2023.
Gabe: An approximate 50 basis points increase in occupancy year-over-year in the third quarter, strong rate growth, continued expense controls, and a favorable Q-mix all contributed to truly stellar bottom-line growth.
Gabe: During the quarter and through the strong selling season, our Trilogy campuses saw accelerating occupancy growth within assisted living and memory care settings that outpaced occupancy growth in our shorter state skilled nursing beds.
Gabe: As of quarter end, occupancy was approximately 175 basis points higher within our assisted living and memory care settings versus skilled nursing at Trilogy campuses.
Gabe: The benefits of this should be realized in operations as assisted living and memory care occupancy tends to be higher margin with longer length of stay providing a solid foundation for sustained NOI growth in the coming year.
Gabe: It's also positive as we head into what's historically been Skilled Nursing's stronger winter season.
Gabe: In our shop segment, we achieved 61.8% year-over-year same-store NOI growth in the third quarter of 2024 compared to the same period in 2023.
Gabe: Continued occupancy gains, accelerating REVPOR growth, and moderating expense growth contributed to remarkable growth last quarter.
Gabe: This level of performance comes from all the work we've done over the last few years to curate our regional operators in our shop segment.
Gabe: One of the advantages of our relative size is that it has allowed us to be highly selective in our operating partners, making sure we work with groups that we trust and have full faith that we will be able to execute alongside, given our hands-on asset management approach.
Gabe: We certainly cannot achieve this level of success without the best operating partners, and I want to thank them for all of their efforts in providing the highest quality of care and experience for our residents.
Gabe: All of the positive organic growth momentum we've observed through the first three quarters of 2024 in our managed portfolio
Gabe: has continued into early Q4 with spot same store occupancy as of November 1st, 2024 at Trilogy at 87.6% and at 89.2% in our shop segment.
Gabe: Over the next 12 to 18 months, we anticipate that the demand for long-term care should only continue to grow, resulting in REVPORT growth, outpacing export growth in our managed portfolio segments.
Gabe: The level of occupancy gains we've achieved so far this year are setting a backdrop for us to drive solid NOI growth and margin expansion next year by focusing on further refining our revenue and expense management at our properties.
Gabe: Now, before I turn it over to Stefan, I want to highlight that operational efficiencies have been a key driver of our success, particularly at Trilogy.
Gabe: Now alongside Trilogy, we're exploring various opportunities to continue refining our operating capabilities across our portfolio, where Trilogy and its best-in-class practices can help support our other regional operating partners.
Speaker Change: This will help build on and level up the current information sharing we facilitate among our operators.
Speaker Change: We've identified both revenue growth and cost savings initiatives as near-term opportunities where we can leverage Trilogy's scale and expertise as a leading provider of care to help drive operations for the rest of our SHOP portfolio operators.
Speaker Change: While we're just getting started exploring these opportunities, I'm personally excited about the potential to tap into yet another way to drive performance and ultimately value for our residents and our shareholders.
Speaker Change: With that, I'll pass it to Stefan to discuss some of our recent acquisitions and what he's observing in the transaction market today.
Stefan: Thanks, Gabe. Our investment team remains busy, and we are in the market actively looking for acquisition opportunities to complement our existing portfolio.
Speaker Change: We intend to remain vigilant in our deployment and respond appropriately to our cost of capital.
Speaker Change: As we look to grow, we are most optimistic about growing our shop segments and expanding our footprint with our stable of strong regional operating partners.
Speaker Change: In the third quarter, we acquired a portfolio of senior housing assets in the state of Washington for approximately $36.2 million.
Speaker Change: The portfolio consists of five assisted living and memory care properties.
Speaker Change: After acquiring the assets, we transitioned the operations to two of our trusted operators, Cogere Senior Living and Compass Senior Living, consolidating operations with two of our operating partners who already have a presence in the region.
Speaker Change: We underwrote the acquisition to a stabilized high single-digit, low double-digit yield. An initial performance in our first two months of owning the assets suggests we will meet that target.
Speaker Change: Through the relationships we have established with our recent shop acquisitions, we were able to unlock additional opportunities such as our most recent acquisition of a shop property located in the Atlanta MSA for approximately $7.5 million.
Speaker Change: The transaction closed after quarter end, and we transitioned operations to Senior Solutions Management Group.
Speaker Change: Although small, this acquisition exemplifies our ability to successfully source acquisitions of assets with debt maturity challenges through the relationships we've established with lenders and special servicers.
Speaker Change: After the annual NCCFALL meeting at the end of September, we came away with conviction that there is ample opportunity to grow in today's market for well-capitalized buyers like ourselves.
Speaker Change: As we look to grow externally, we do not need to pursue large portfolios of shop assets that are widely marketed.
Speaker Change: because we believe we have multiple avenues for growth that are more attractive, whether it be with trilogy, single asset deals, or smaller portfolios, off-market opportunities with our regional partners, or through the relationships we've strategically built, which unlock some of our most recent acquisitions.
Speaker Change: Given all these potential growth avenues, we have built and are adding to our pipeline of potential investments.
Speaker Change: and are actively underwriting acquisition opportunities that meet our quality standards and return requirements.
Speaker Change: If we execute on these potential investments, we are confident that the assets would complement our portfolio and create value for our stockholders.
Speaker Change: Lastly, on the disposition front, we are continuously assessing non-core assets for sale and dispose of an outpatient medical building subsequent to quarter end for approximately $19.4 million.
Speaker Change: I'll now turn it over to Brian to discuss our financial results for the quarter and expectations for the rest of the year.
Brian Peay: Thanks Stefan. In the third quarter we reported an FFO of 36 cents per diluted share. This performance reflects exceptional operating results and successful transaction activity, especially our acquisition of the 24% interest in Trilogy that we didn't already own and the acquisition of a shop portfolio in Washington State.
Brian Peay: Our results have led us to increase our same-store NOI growth and NFFO guidance for the full year 2024 to reflect year-to-day performance and our expectations for the balance of the year.
Brian Peay: Importantly, we have been able to deliver on key capital allocation initiatives to grow accretively and bolster the strength of our company and our capital structure.
Brian Peay: We are increasing Total Portfolio 2024 Same-Store NOI Growth Guidance to 15-17%, which is up 300 basis points at the midpoint from our most recent guidance.
Brian Peay: Additionally, we are increasing our 2024 NFFO per fully diluted share guidance significantly to a range of $1.40 to $1.43.
Brian Peay: Across our various segments, we are updating full-year same-story NOI growth expectations to the following ranges.
Brian Peay: 21 to 23 percent same-store NOI growth in our integrated senior health campuses, up from 18 to 20 percent.
Brian Peay: 51.5% to 53.5% same-store NOI growth in our shop segment, up from the prior range of 45% to 50%.
Brian Peay: 2-4% same-story NOI growth in our Triple Net Lease Properties segment, up from the previous range of 1-3%.
Brian Peay: We are leaving our outpatient medical segment same-store NOI growth guidance unchanged as we anticipate a bit more move-out activity in the fourth quarter than new leasing.
Brian Peay: Our normalized funds from operations guidance is increasing from a previous range of $1.23 to $1.27 per fully diluted share to a range of $1.40 to $1.43 per fully diluted share for the full year 2024, which is an increase of $0.165 at the midpoint.
Brian Peay: Our revised guidance does not include any impact from transactions that have not already closed, including possible future acquisitions or dispositions and capital market activity.
Brian Peay: Through the first three quarters of 2024, our earnings have included approximately four cents of NFFO per share benefit that was not previously contemplated at the beginning of the year from miscellaneous other income predominantly coming from insurance reimbursements.
Brian Peay: and we have visibility to an additional two cents per share benefit to our NFFO guidance from items expected to occur in the fourth quarter.
Brian Peay: Therefore, the revised range of $1.40 to $1.43 in FFO per share includes approximately $0.06 per share benefit from other income.
Brian Peay: Moving to the balance sheet, our company's leverage has improved meaningfully since the IPO earlier this year. Our current debt to EBITDA is 5.1 times as of September 30th, 2024, which is a near one and a half turn reduction in that ratio from the end of the first quarter of 2024.
Brian Peay: This reduction is attributable to our strong property performance and debt paydowns from capital markets activity. Moving forward, we remain committed to allocating capital efficiently and will seek to maintain conservative leverage, have less secured debt, and less floating rate debt.
Speaker Change: That concludes our prepared remarks. Operator, with that, we're ready to open up the line for questions.
Thank you.
Thank you.
Speaker Change: If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star 1 again. If you are dialed in and listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: We kindly ask that you please limit yourself to one question and one follow-up.
Speaker Change: Our first question comes from the line of Joshua Dennerlein with Bank of America. Please go ahead.
Speaker Change: Hey everyone, thanks for the time. Gabe, could you provide a little more color on the Trilogy platform and you know what is it that is unique that can maybe be leveraged across the rest of your operators on the shop side? I think that would be interesting to hear.
Sure Josh, happy to do it.
Speaker Change: Trilogy has proven in the eight years that we've owned the company to be the best management team that we've worked with certainly or one of the best in our portfolio at the very least.
Speaker Change: And we've tried to share best practices across our portfolio for a long time now. This isn't something that's new.
Speaker Change: We've had operator summits where we bring all of our operators to one location together to share best practices and get better as a company. What is new is that we own 100% of Trilogy now, and as a 100% owner of Trilogy, we started talking to the management team about ways that we could
Speaker Change: leverage their platform to help support our other regional operators that don't have the size and scale and sophistication, maybe, as Trilogy.
So.
Some of the things that Trilogy does.
Speaker Change: have them help and support and share their strategy with our other operators on.
Speaker Change: Brian, you mentioned an insurance benefit. What exactly is that insurance benefit coming from?
Speaker Change: Yeah, so Josh, typically that's going to be, you know, you have a loss at a property and you receive the insurance proceeds.
That's not real estate revenue, not real estate NOI.
Speaker Change: That's just one component. It's really a hodgepodge of other non-real estate amounts. And as I said, it's been about four cents.
Speaker Change: per share so far through the end of Q3. And we have visibility to maybe another two cents. It's not all insurance, but that's the biggest line item.
Okay, thanks for clarifying that. Thanks, Brian.
Speaker Change: Our next question comes from the line of Austin Warschmidt with KeyBank Capital Markets. Please go ahead.
Hey Austin. Thank you. Hey everybody.
Speaker Change: So, with occupancy continuing to climb gradually at Trilogy, you've spoken about this ability to be more selective on residents that they accept, and I think you even referenced the higher senior housing occupancy versus skilled this quarter. Can you give us a sense of how impactful that can be to the bottom line and just how you think about that mix going forward for overall portfolio occupancy, senior housing versus skilled?
The
Danny Prosky: Yeah, so Austin, this is Danny, and if you recall either the last call, I think it was actually the first call of the year back in, for Q1.
Danny Prosky: At the time, Trilogy's occupancy was running right about even between the ALIL side and the SKILT side. Both were rising at a very nice clip. And we said, look, our expectation is that the ALIL occupancy will surpass SKILT.
Danny Prosky: the skilled occupancy, and it has. We're about 150 bips higher today.
Danny Prosky: just as expected. It's really very different, the types of businesses, right? AL and I, we want to get that occupancy up as high as we possibly can.
Danny Prosky: and of course it's also a huge feeder into the ALI side of the business, right? Those residents come in, they, you know...
Danny Prosky: typically on average, they may go home. Oftentimes they go into AL or IL, and even if they go home, very often they'll end up coming back to Trilogy AL or IL sometime in the future.
Thank you.
Danny Prosky: The goal isn't necessarily to be 98% on the skilled side. You always want beds available to admit from the hospitals. You don't want to be in situations where the hospitals want to admit patients and you don't have room for them.
Danny Prosky: If Trilogy wanted to push occupancy up well into the 90s, they could do so very easily on the skilled side. They could just fill them up with Medicaid beds. But that's not the goal. The goal is to, you know...
Danny Prosky: more Medicare, more private pay, things of that nature. Even with Medicare Advantage, which is a growing part of the Trilogy business line as you can imagine, they're very selective of Medicare Advantage. If they can't get specific rates from the insurers, they won't sign a contract.
Danny Prosky: They may accept Medicare Advantage patients from those insurers, but each one is going to have to be negotiated at a higher rate than what the original contract offer was. So and, you know, fortunately, we're in a position, a trilogy where we can be selective from a Medicare Advantage perspective.
Danny Prosky: Most of the insurers really need to work with Trilogy, you know, Trilogy is the dominant provider. They're the high quality Better outcome provider, which I think we're seeing is more and more important today If they want to maintain those star ratings meaning the advantage providers, they need to partner with high quality providers
Danny Prosky: But really the goal there isn't necessarily to maximize occupancy, it's to maximize NOI.
Speaker Change: Yeah, that makes a lot of sense, a lot to chew on, so thanks for the thoughts there.
And then you also, Riley, Danny
Speaker Change: the improvement in your cost of capital, lower levered balance sheet.
Speaker Change: And I guess, you know, when you look at the opportunities in front of you, can you differentiate, I guess, between sort of the...
maybe targeted annual investment in some of these trilogy.
Speaker Change: You know opportunities that you know you may be able to fund with free cash flow versus what the pipeline of external investment opportunities looks like you know
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Speaker Change: Thank you. Sure. So clearly, our cost of capital has improved tremendously this year to the point where external acquisitions are much more creative today than they were, call it, six months ago. Now, we were very, we grew a lot this year, right? We did over 650 million of acquisitions.
Speaker Change: Now, $500 million of that, of course, was buying out Trilogy.
Speaker Change: The Washington Portfolio, the Oregon Portfolio, the small deal we did in Atlanta.
Speaker Change: The nice thing about all of those is none of those were competitive, right? We were the only, those were all our deals, right? Trilogy, obviously, was our deal. Washington and Oregon, we were able to, to, to.
Speaker Change: and David Meyers. Thank you. 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Speaker Change: I think you'd expect us, and by the way, that doesn't even include the developments that came out of the ground this year with Trilogy, right? We opened up four new campuses, several expansions, so our growth is really way ahead of 650 million.
Speaker Change: There's still a lot of growth opportunities at Trilogy. We've talked about anywhere from $100 million to $200 million a year of annual development within Trilogy, and that'll be a mix of new campuses, villas, and expansions, and we expect that to continue.
Speaker Change: We do have nine properties at Trilogy that we either lease or we do not own 100% of.
Speaker Change: If you recall, earlier this year we bought out three assets at about a 9.1% cap on our rent.
Speaker Change: We don't have options on the remaining four that are leased, but we think we have the inside track to buy those.
Speaker Change: at similar pricing. The other five, we own under a joint venture structure. It's 50-50. We have purchase options on those. Those options are designed to be bought out upon stabilization. There may be an opportunity for us to buy those out earlier. So, you know, aside from the development that we expect to see year in, year out at Trilogy,
Speaker Change: I've called it 100 to 200 million, you know, we still have another nine assets that we have the ability to buy that we do not yet own.
Speaker Change: And then I think you're going to see us do more outside external growth next year than we did this year, mainly because of our cost of capital. And, you know, we've already started to accelerate that pipeline. I think you'll see more news to come next year on that.
Speaker Change: You know, we've got boots on the ground with respect to our regional operators. They're helping us find transactions, which is terrific. You know, they're in those markets. They understand the assets. They understand the demographics.
Speaker Change: And then as well as that, we've got existing relationships with special servicers and lenders on deals that might be a little bit underwater on their financing.
Speaker Change: and being a well-capitalized buyer like we are, it is a tremendous competitive advantage. We're shying away from bidding wars, and we're being particularly disciplined about our underwriting on these assets.
That's great, Colin. Thanks, everybody.
Speaker Change: Our next question comes from the line of Michael Carroll with RBC. Please go ahead. Hey, Mike.
Speaker Change: Hey, thanks. Can you guys provide some more color on how you're viewing, I guess, operating expenses specifically within the Trilogy and the Seniors Housing Operating Portfolio? It looks like you had some pretty good expense controls this quarter, at least versus our estimate. I mean, if inflation starts to tick up next year, I mean, will expense growth also tick up? Or is it occupancy at that level now where you should be able to offset it just because you have a bigger occupancy pool to kind of overlay some of those fixed costs towards?
Speaker Change: Yeah, so I'd say a few things on that. So, you know, clearly our REP or growth has exceeded our export growth, which is what we'd expect.
Speaker Change: and we think that will continue. So from an expense growth perspective, we seem to be back to kind of where we were pre-COVID, you know, typical wage growth in the three to three and a half percent range, which was the biggest pressure point on expense growth over the last few years.
Speaker Change: I think on X4, because our occupancy gets higher, you spread that over a greater number of occupied units, so that also kind of keeps your X4 growth lower because you're spreading out your fixed costs over more units.
Thank you. Thank you. Thank you.
Speaker Change: You know, we expect that red pork growth will continue to exceed export growth going forward.
Speaker Change: We're very bullish on just the supply-demand fundamentals, and we think occupancies will continue to move up, and we'll have better ability to raise rates. We mentioned earlier this year that we expect our export growth to increase each quarter, and it has.
Speaker Change: As far as inflation coming back, clearly... I'm sorry, I think you meant RevPoor.
Speaker Change: I'm sorry, you said export. Oh, I'm sorry, RETPOR. Pardon me. Yeah, so we said that RETPOR growth would accelerate throughout the year and it has. It's gone up every quarter. And it's easier, of course, to increase your RETPOR as your occupancies grow, which has happened and we think will continue to happen.
Speaker Change: That being said, if inflation kicks in, yeah, I would imagine our expenses would grow faster than they are today. I think that's probably the likely outcome, but I think we'd probably more than make it up on revenue.
Speaker Change: Okay, and then, Danny, how are you viewing the labor environment? I mean, how difficult is it to find good employees, I guess, versus a few years ago, and if, like, the new administration starts to have tighter immigration policies, does that negatively impact your ability to find employees or your operators to find employees? Is that a potential concern, and where are we at today, right now, as of that?
Speaker Change: Yeah, well I'd say, you know, employment has been and continues to be the biggest
you know, pressure point, I would say, on this business.
Speaker Change: I think, you know, looking at Trilogy is a great example.
Speaker Change: Their employee retention today is back to where it was pre-COVID.
Speaker Change: Right after COVID, of course, employee retention dropped, as you can imagine, but we're back up to where we were before, which is kind of industry-leading employment retention. So there's always pressure on the employee side. If you're able to attract and retain employees, that's probably the most important part of the business.
Speaker Change: I would say that if we start limiting the number of employees in the country, that's probably not a good thing for our business, but it's really hard to say.
Speaker Change: And Danny, I'd add to that that, you know, we see that as a risk regardless of what the immigration policy is, as a pressure point, just because we feel like the demand is coming and you need to hire more people to meet this demand. So we're trying to get out in front of it, Mike, by having training programs like Trilogy does with all of our operators where the training offers people a path to a longer career and improves employee engagement and employee engagement drives retention.
starts with the employees. So investing in the employee experience
Speaker Change: Trilogy does probably better than anyone. And utilizing, to my earlier point and earlier comment, the strategies that have really worked for Trilogy throughout our portfolio is a way I think that we can drive out performance. Yeah, their CNA training program has been a huge success.
Okay, great. Thanks for the information.
Speaker Change: Again, if you would like to ask a question, please press star then 1 on your telephone keypad.
Speaker Change: Our next question comes from the line of Ronald Camden with Morgan Stanley. Please go ahead.
Speaker Change: Hey, just two quick ones from me. So starting with both Trilogy and the SHOP portfolio, looking at occupancy at about 87 for Trilogy, almost 88 for SHOP, maybe can you give us some updated thoughts on...
Speaker Change: where you think that occupancy can trend and specifically, can you talk about sort of operating leverage at these levels of occupancy for the incremental tenants? Thanks.
Speaker Change: So our expectation is it will continue to trend up. I mean, you know, we track this weekly and.
Speaker Change: Occasionally we have a week where occupancy doesn't tick up and more often than not it goes up. Now of course we just, you know, we just got through the summer season. We'll see what happens over the winter. You know, we're very bullish on the space in general because we see the growth in demand but we don't see much growth in supply.
Speaker Change: I don't want to give a target, I just think it's going to trend up. I expect we'll be in the 90s. Is it going to be early next year, late next year? I'm not quite sure, but I expect it will continue to trend up. As far as the incremental margin...
Speaker Change: It varies on all kinds of things right first of all the line of business you clearly on IL It's a higher increment than it is on AL and on skilled You know we generally look at you know 40 to 80 percent depending on the line of business
Speaker Change: IL is probably even higher if you're fully leased. Now as you get into higher and higher occupancies, you know, at some point your employment is, you know, pretty much at full for each building, and then your margins get even better.
Bye.
Speaker Change: We usually look at 40-80% depending on the line of business.
Speaker Change: It's because you're optimizing for other things, right? You can charge better rates. You can stop paying referral fees to referral sources. You can stop doing move-in discounts. There are a lot of different levers to maximize the NOI that I think...
Speaker Change: You need to focus on the bigger picture, not just occupancy growth, because as we ratchet up occupancy to get to those higher levels, you're managing a lot of different things at that point to drive NOI.
Speaker Change: Got it. Makes total sense. And then just switching gears to sort of the external growth.
Speaker Change: And I think part of it, I'm just curious about how much more non-core sales you have to fund that, but also just in terms of just operator relationships, types of deals that you're looking at. We'd love to hear a little bit more color how you guys are thinking about that, thanks.
Yeah, so, you know...
Speaker Change: If you go back to last year, we were doing some non-core sales really to fund growth. Today, I don't think we're doing it to fund growth. I think we're doing it to improve our portfolio. We've been selling off outpatient medical buildings for the last couple of years. If you recall a couple of years ago, we were about 35% of our NOI was outpatient medical. Today it's 20% and dropping. I would expect that trend to continue.
Speaker Change: I think you'll see more announcements next year about us selling off more of our patient medical buildings.
Speaker Change: I don't think we're doing that now in order to fund external growth, although, you know, clearly we are, right? If we're selling...
Speaker Change: an outpatient medical building at a 7 cap, reinvesting it at a 7 cap or even higher in a shop portfolio, well that's going to have more growth in that outpatient medical building more than likely. So yeah, we'll turn around and reinvest in external growth, but I think our external growth is going to be higher.
then our dispositions going forward.
Speaker Change: And as far as the assets that our regional operators are sourcing for us...
Speaker Change: You know, I think if you look at our portfolio, you recognize that we're maybe a little bit higher acuity than some of our peers. So a little bit less IL, a little bit more AL. And as a result, you know, the assets that our regional operators are looking at are really right in line with what they're operating for us.
Speaker Change: So you're going to see us, you know, adding to our AL portfolio. We like the IL business. We want to make sure we can be competitive as far as returns go on that. But generally speaking, you know, they're in the markets and they're looking for assets that look a lot like what they are already operating for us.
Speaker Change: and they know what we're looking for and this isn't just a partnership where we're acquiring assets and then bringing them in at the point where we close.
Speaker Change: We're partnering with them up front, going through the underwriting with them, getting understanding of that market with them. So we're really going hand-in-hand with our operators through the whole process.
Alright, that's it for me. Thanks.
Speaker Change: Our next question comes from the line of Michael Griffin with Citi. Please go ahead.
Hey, Grefg.
Speaker Change: Well listen, I think you mentioned it, if you're thinking about
real estate, NOI
excludes that two cents of miscellaneous income.
Speaker Change: pardon me I think you've got those numbers right the reality is that there is seasonality and and it's it's showing up more today than it has in the past because in the recent past
Speaker Change: because in the past, everything was just going up and those increases in occupancies were eclipsing the seasonality that's embedded in the long-term care side of the business.
Speaker Change: I would say 39 and a half. I certainly wouldn't just chuck that in and say that's going to be Q1's number. But as you said, you're not asking for 25 guidance and I'm not giving 25 guidance.
Speaker Change: Appreciate that, Brian. And then maybe just some more color on the deal activity. It seemed it was more kind of driven on the debt side and taking over some of these properties at a more favorable basis. As you look out to the transaction market, is this where you're seeing the bulk of the opportunity, maybe on the debt side? And then if you could broadly comment on the availability of lending or debt capital within the senior space, that would be helpful.
Speaker Change: That gave us certainly an advantage there. The Atlanta deal, that was another case where because of our relationship with the special servicer, we had an insight track there as well.
Speaker Change: But I don't I wouldn't necessarily say you're we're going to see a glut of these types of transactions, you know, there there are certainly deals out there where the lenders are inside the bars in a position where they need to do something in the lenders are going along with it but there are also a lot of cases where I think we'll see lenders and borrowers kind of
Speaker Change: holding on because we are obviously seeing performance improve across the board throughout the industry.
So, you know, as far as...
Speaker Change: we're going to be seeing a lot of deals, certainly we'll be obviously talking to
Speaker Change: Brokers and looking at the broker deals, but but we're also going to be focusing a lot on the off-market deals Which is going to be?
Speaker Change: deals that our operators might see because of where they're focused and maybe the relationships they have.
Speaker Change: We could be also looking at deals that our own operators might own that they want to sell.
Speaker Change: So, I mean, we have a lot of different avenues here that we can go to. And it's not necessarily going to be portfolio deals that are out there being broadly marketed.
Speaker Change: We're really going to be focused on the rifle shot, not the shotgun approach.
when looking at new transactions.
Yeah, I think that's absolutely right, Stefan. I think that...
Speaker Change: that these are just opportunities that we have been able to exploit currently. I think if you fast forward out a year or two, I don't know that every one of the deals that we're going to get is going to come through special servicing and alike. I think it, as we say, we have an opportunity.
to source leads for acquisitions from our operators.
Speaker Change: and from our special servicing relationships. Ultimately, we will continue to look at deals that come through the brokers. And as to the second part of your question about the financing market, you know, the reality is it's.
It's not...
Speaker Change: It's still a little bit gummed up. It's not a fully functioning financing markets out there, but that's okay. Frankly, we are not really looking for additional secured indebtedness. We're not really looking for project specific indebtedness.
Speaker Change: So, we can live with that. And then, just to kind of dovetail your question with some of the questions earlier, you know, to give you the hierarchy of our sources of capital, pretty clearly the cheapest source of capital that we have is internally generated retained earnings, right? So,
Speaker Change: And then, you know, you're looking at that, and now it's kind of a toss-up. That's not super readily available.
Speaker Change: What it is coming out at is a little bit expensive. Our equity, you know, we do understand and believe that there's got to be growth in our earnings, so cost of equity is not just a simplistic, certainly not our dividend yield, I can tell you that much.
Speaker Change: But ultimately, that's sort of the hierarchy, and it's good that we don't really need project-specific secured financing today, because that market is not functioning fully.
Speaker Change: much quicker action in terms of how we are looking at deals. And in just that short period of time, we've looked at well over a billion of potential transactions.
Speaker Change: I'd say about 800 million of that is in the shop side of it. So, you know, there's a lot out there for us to look at, and I think there are going to be a lot of opportunities for us to do new things.
Thank you.
Great, that's it for me. Thanks for the time.
Speaker Change: Our next question comes as a follow-up from Austin Wershman with KeyBank Capital Markets. Please go ahead.
Austin Wershman: Great, thanks for taking the additional question, just piggybacking a little bit on what you were talking about hierarchy in terms of
Austin Wershman: Attractiveness of funding options. Earlier this year you were kind of focused on wanting to over-equitize yield and continue to drive down leverage. You've been able to do that sooner than expected, I guess. So how should we think about sort of your plans to fund acquisitions that do come your way from a mixed perspective of debt and equity? Thanks.
Thank you.
Speaker Change: Yeah, so, you know, as you're well aware, we did a follow-on offering a little under two months ago. We have a 60-day lock-up that expires next week.
Probably more to come after that.
Speaker Change: I think we have been very clear with the market that we are comfortable with debt to EBITDA in the 5.5 to 6.5 range. Through organic earnings growth and some additional proceeds from the following offering, we were able to get that down to 5.1 times at the end of Q3.
Speaker Change: My guess is, with the continued organic earnings growth, that number goes lower and lower, which is terrific.
Speaker Change: It's not like we're going to run out and spend that money as fast as we can to get it back up into the mid...
Speaker Change: mid-fives to mid-sixes. We're quite happy where we are today, but if ultimately the stock price continues to perform and we're able to issue equity in the most non-dilutive way possible, that would be an attractive source. Thanks, guys. Appreciate it.
Thanks for taking the time.
Speaker Change: We have no further questions at this time. I will now turn the call back to Danny for any closing remarks.
Danny Prosky: Thank you very much, Operator. We appreciate your help on this. And to everybody on the call, thanks again for spending some time with us today. Looking forward to seeing a lot of you next week at NARIT.
Danny Prosky: and looking forward to more of these calls. We are, like I said, we are very excited about the next few years in this business.
Danny Prosky: So, have a great rest of the week, everybody, and we'll see you next week.
Speaker Change: This concludes today's conference call. Thank you all for your participation. You may now disconnect.
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Speaker Change: Anthony Powell, Michael Carroll, John Pawlowski, John Pawlowski, John Pawlowski, John Pawlowski Anthony Powell, John Pawlowski, John Pawlowski, John Pawlowski, John Pawlowski, John Pawlowski