Q4 2024 American Healthcare REIT Inc Earnings Call
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John: Good afternoon and thank you for standing by. My name is John and I will be your conference operator today. At this time, I would like to welcome everyone to the American Healthcare Read Fourth Quarter 2024 Earnings Conference Call. All lines have been placed in 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 during this time, simply press star followed by the number one on your telephone keypad.
John: All forward looking statements speak only as of today February 28, 2025, where 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.
John: During the call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP reconciliation of non-GAAP financial measures discussed on this call to the most directly comparable measures calculated in accordance with GAAP.
GAAP are included in our earnings release supplemental information package and our filings with the SEC.
John: 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 Dot American health care REIT dotcom.
Speaker Change: That I will turn the call over to our president and CEO Danny Pruski.
Danny Pruski: Thank you Alan and good day, everyone. We appreciate you joining us on today's call.
Danny Pruski: We have much to celebrate and future success is to look forward to here at American health care REIT.
Danny Pruski: We recently commemorated the anniversary of our first full year as a listed healthcare REIT a milestone achieved through the dedication of our HR team, who invested countless hours to get us here.
Danny Pruski: I'm grateful to work alongside such a committed group it shows up day in and day out to deliver on our mission, which I've shared on other calls providing high quality care high quality health outcomes and strong financial performance across our portfolio.
Danny Pruski: I'm proud that we've delivered on this mission in 2024, and I look forward to the HR team and its partners delivering on it once again in 2025.
Danny Pruski: This continues to be one of the most favorable fundamental backdrops for long term care that I've observed during my 33 year career in the health care REIT industry.
Through 2030, the 80 plus year old population is expected to grow by over 700000 individuals on average each year against the supply backdrop of the senior housing industry only having added less than 20000 units on average each year since 2020.
Danny Pruski: I am confident that across our portfolio, we will be able to capture this growing demand wave now.
Danny Pruski: Now, let's dive into our results.
Danny Pruski: In the fourth quarter of 2024, our operational results reflected another exceptional period of same store NOI growth, meaning the rising long term care needs of an aging population.
Danny Pruski: Our hands on asset management approach has continued to expand NOI margins, particularly within our managed segments that are comprised of our integrated senior health campuses, which we also refer to as trilogy and shop portfolios.
Danny Pruski: As we enter 2025, we expect the rate of revenue growth to continue to exceed the rate of expense growth positioning us to build on the impressive same store NOI growth that we achieved in 2024.
Danny Pruski: NOI from trilogy, and shop segments has grown to 71% of our total NOI as of the end of the fourth quarter in 2024 and.
And we expect this share to continue to grow by year end driven by both organic earnings growth and our investment strategy.
Danny Pruski: Our trilogy segment, which is the largest segment in our portfolio contributed the largest share of our growth in 2024.
Danny Pruski: This segment of our business meets the essential needs of an aging population.
Danny Pruski: We believe that our trilogy campuses are the gold standard asset class within the senior housing industry.
Danny Pruski: Our purpose built design and the capabilities of trilogy management services as our partner.
Danny Pruski: Treat all different levels of acuity have resulted in robust health outcomes to residents, which has helped to propel the strong financial results for the portfolio.
Danny Pruski: Trilogy business and quality of care outcomes were recently highlighted by truly just overall CMS star rating exceeding over four stars on average portfolio wide.
Danny Pruski: I believe <unk> operating model, along with our service standards and their commitment to residents and employees differentiate our trilogy segment within the industry.
Danny Pruski: On the capital allocation front, we remain focused on accretive external growth primarily through a RIDEA structured senior housing and care investments leveraging our favorable cost of capital and balance sheet capacity to execute on new acquisitions and to fund our captive trilogy development pipeline.
Danny Pruski: In 2024, we invested over $650 million in external growth in our managed long term care segments, and we're optimistic about unlocking further value through investment activity in 2025.
Danny Pruski: Already in 2025, we announced that we are under contract to acquire two new shop assets.
Danny Pruski: We closed on a lease buyout in our trilogy segment and announced plans to start several new trilogy development projects. This year.
Danny Pruski: We believe that these investments will continue to grow our exposure to what we currently see the best risk adjusted returns, which is a managed long term care.
Danny Pruski: Our guidance, which Brian will break down in more detail later on the call does not include investments beyond those announced last night, but our cost of capital and a strong balance sheet position us well to pursue accretive opportunities that may arise.
Danny Pruski: Our net debt to adjusted EBITDA has dramatically improved from both organic growth as well as our capital allocation activity decreasing from eight five times at the end of 2023 to four three times at the end of 2024.
Danny Pruski: This provides flexibility to pursue accretive internal and external opportunities over a sustained period of time.
Danny Pruski: In aggregate, we finished 2024 within the increased normalized funds from operations or NFL per share guidance range, we set last quarter.
Danny Pruski: We realize these earnings while further refining our portfolio with several opportunistic dispositions that closed in the fourth quarter and raised attractive equity capital via our ATM program.
Danny Pruski: Everything we achieved over the last year I believe strengthens the quality of our portfolio and earnings and provides us with more optionality to grow efficiently within our expanding industry.
Danny Pruski: Before handing it over to the team to discuss our results and outlook for 2025 in more detail I want to note that we recently received questions from investors regarding potential policy changes in the health care sector, primarily related to Medicaid.
Danny Pruski: Those of us that have been in this business for an extended period of time are used to seeing these types of potential policy shifts and have navigated changes over the years.
Danny Pruski: We welcome any questions and are happy to address them during the Q&A. However, as of now it would be speculation as to what would occur with the ever changing regulatory discussion.
Danny Pruski: With that I'll turn it over to Gabe to discuss our operational results in more detail.
Gabe: Thanks, Danny our exceptional operational performance in Q4, and full year 2024, really highlights the strength of our diversified portfolio and our hands on asset management approach, which allowed us to capitalize on water highly favorable supply and demand fundamentals.
Gabe: Total portfolio same store NOI grew 21, 6% year over year in the fourth quarter, bringing full year 2020 for same store NOI growth to 17, 7% compared to 2023.
Gabe: Not surprisingly our trilogy in our shop segments continue to lead our quarterly and full year results.
Gabe: In our <unk> segment same store NOI grew by 28% year over year in Q4 of 2024. This brought full year same store NOI growth in trilogy, two to 23, 8%.
Gabe: As I've discussed before <unk> as many levers to drive growth and optimize operations and multiple sources contributed to growth in this segment Aki.
Gabe: Occupancy gains, particularly in lower acuity care settings, such as assisted living and independent living as well as Medicare reimbursements private pay rate growth and disciplined expense control all contributed to a sustained high performance.
Gabe: These factors also drove meaningful margin expansion throughout the year with same store margins in Q4, just shy of 19% and the margin achieved in Q4 2024 marks a return to <unk> pre pandemic margin levels.
Gabe: We're also encouraged by our operating initiatives that trilogy, playing out in our performance in 2024.
Gabe: For example, we noticed this in the fourth quarter is 40% of new admin and trilogy is assisted living and memory care and independent living care settings came directly from its skilled nursing stays which was a focal point and is ahead of conversion rates, we achieved last year.
Gabe: Strong occupancy in assisted living and independent living villas bodes well for additional margin improvement since those settings typically required less staff and are typically longer length of stay versus triologies post acute skilled nursing beds.
Gabe: Looking to 2025, I expect trilogy to leverage increasing demand to increase occupancy enhanced pricing efficiency through private pay rate increases and importantly street rate optimization and continue refining its SKU mix, which by the way improved as a percentage of patient days by 130 basis points year over year.
Gabe: <unk> to 73, 8%.
Gabe: As we noted last quarter and consistent with trilogy business, we expect modest sequential headwinds to trilogy NOI in the first quarter of 2025 versus the fourth quarter of 2024, largely due to the start of the new year resetting certain compensation related expenses and they're being just fewer days in Q1 versus Q4.
Gabe: As a reminder, reimbursement for trilogy skilled nursing beds are based on a daily rate <unk>.
Gabe: Despite sequential changes Q1, 2025 NOI of trilogy is expected to be significantly higher versus Q1 2024.
Gabe: In our shop segment same store NOI grew over 65% year over year in Q4, 2024, driven by accelerating revpar growth occupancy gains and again strong expense management.
Gabe: For full year 2024 shop achieved record same store NOI growth of 52, 8%.
Gabe: Looking ahead to 2025, we expect further occupancy gains and now that we've achieved a critical mass occupancy level pricing strategies will become an even more important driver of NOI growth.
Gabe: The operating leverage at these occupancy levels has led to significant margin expansion with same store NOI margins, improving over 700 basis points in Q4, and 500 basis points for the full year compared to the same periods in 2023.
Gabe: Now as we've seen historically in the industry the colder winter months and this year is particularly heavier flu season did result in some seasonality to start the year within our managed care segment, which is resulting in some operating offsets between our trilogy in our shop segments, where we're seeing increased occupancy at trilogy to start the year, especially in the skilled nursing setting.
Gabe: <unk>.
Gabe: And with occupancy in our shop segment seeing some modest headwinds.
Gabe: Regardless, we remain confident growth will continue to ramp across our managed long term care assets, particularly as we enter into the warmer spring and summer selling season.
Gabe: Overall I'm proud of how our highly curated group of regional operators and our operations teams have delivered a really strong year of NOI growth in 2024, and even after robust growth in 2024, we expect double digit growth again in 2025, and our shop segment.
Gabe: Our outlook remains positive we anticipate that Revpar growth will continue to outpace export growth in our managed portfolio segments over at least the next 12 months to 18 months driving further NOI margin expansion.
Gabe: A big component of our confidence is driven by persistent barriers to new supply since the onset of the pandemic. The cost to develop has increased considerably as a result of not just construction cost rising but also financing costs rising at the very moment the industry needs to increase the rate of construction to meet growing demand the exact opposite is happening and.
Gabe: <unk> starts are still decelerating.
Gabe: Consistently monitoring our own portfolio, we have yet to see any changes to the supply landscape in our markets setting us up with strong fundamentals that could persist into the next decade. Looking ahead three years to five years, we are confident that the aging population tailwind combined with the limited new supply will continue to propel NOI growth across our.
Gabe: Yeah.
Gabe: With that I'll turn it over to Stephane to discuss recent transactions and his insights on today's transaction markets.
Stephane: Thanks Kipp.
Danny Pruski: As Danny mentioned and as we discussed last quarter. Our team continues to actively execute on our strategy of strengthening the quality and durability of our earnings.
Danny Pruski: We are currently achieving this by sourcing capital through opportunistic dispositions from our lower growth assets and segments, while targeting the best risk adjusted returns for capital deployment and.
Danny Pruski: In the fourth quarter, we sold approximately $140 million worth of properties across various segments by capitalizing on strong demand for assets that do not align with our long term vision for our portfolio.
Danny Pruski: This included the disposition of a triple net lease portfolio of lower quality skilled nursing facilities that have inherently limited growth.
Danny Pruski: It did not meet the profile of assets, we want to support our future earnings.
Danny Pruski: As we enter 2025 market conditions remain dynamic, but transaction volumes have improved versus a year ago.
Danny Pruski: This is highlighted by our investments team, having already evaluated a meaningful number of potential shop deals since the beginning of this year compared to the same period in 2024.
Danny Pruski: As a well capitalized buyer not reliant unsecured financing, we are well positioned to take advantage of these incremental opportunities while maintaining our disciplined approach in pursuing new investments that align with our portfolio strategy and return requirements.
Danny Pruski: The increased deal volume that we have seen combined with our strong operator relationships has resulted in us identifying new opportunities that meet our investment criteria.
Danny Pruski: We announced yesterday that we are under contract to acquire two shop properties for a total expected cost of approximately $75 million.
Danny Pruski: In closing in the first half of 2025. These properties will be operated by two of our trusted regional operators.
Danny Pruski: We also completed a lease buyout this week within our trilogy segment for approximately $15 9 million.
Danny Pruski: In addition to these acquisitions, we plan to bolster our external growth by breaking ground on approximately $140 million in new trilogy development projects in 2025, including new campuses independent Linden Miller's campus and weighing expansions.
Danny Pruski: Last quarter I highlighted several avenues for external growth and we are actively pursuing all of them.
Danny Pruski: Our recent activities in the fourth quarter and early 2025 demonstrate this commitment including sourcing off market shop opportunities with our regional operators and other strategic relationships focusing on single asset or smaller portfolios that meet our quality and return requirements and funding new accretive trilogy captive development.
Danny Pruski: I want to emphasize that as we deliver on our capital allocation strategy all of the underwriting. We are conducting is in close partnership with our operators to mitigate operational execution risk.
Danny Pruski: Our relative size offers ample opportunities to drive significant value from our investments we remain focused on ensuring strong performance from every dollar we invest.
Danny Pruski: Now I'll turn it over to Brian to discuss our fourth quarter and full year 2024 results financial positioning in 2025 guidance.
Brian: Thanks, Stefan in the fourth quarter, we reported normalized funds from operation or <unk> 40 per diluted share. This resulted in full year 2024, and <unk> per diluted share of $1 41.
Danny Pruski: Which was within our guidance range.
Danny Pruski: These earnings reflect strong operating results and successful transaction activity, while executing on the business plan, we laid out at the beginning of the year as well as taking advantage of opportunities that were not originally contemplated.
Danny Pruski: Gabe referenced earlier, our full year 2024 total portfolio same store net operating income growth was a sector, leading 17, 7%.
Danny Pruski: Our initial guidance for 2024 was influenced by the fact that the industry was in the midst of the recovery from the impact of the pandemic. Additionally, our initial 2024 earnings guidance did not contemplate the accretive acquisition opportunities that we were able to complete such as the purchase of the minority interest in trilogy, nor the sale of additional share.
Danny Pruski: <unk> with proceeds used to reduce our leverage ratios.
Danny Pruski: Our approach to setting guidance for 2025 will in many ways be much easier within our managed segment and with anticipated occupancy growth still strong, but not necessarily at the pace that it was last year.
Our total portfolio same store NOI growth guidance is between seven and 10% for the full year of 2025. This guidance is comprised of the following segment same store NOI growth targets.
Danny Pruski: 10% to 12% growth for trilogy <unk>.
Danny Pruski: Negative 1% to positive 1% for outpatient medical.
Speaker Change: 18% to 22% growth, where our shop segment and declines of one 5% to a half a percent for our triple net lease properties.
Speaker Change: The guidance for outpatient medical reflects headwinds from expected tenant move outs and with respect to the guidance for the Triple net lease segment. It reflects a lease extension and rent reset for one of our tenants that extends the lease term and provides for improved lease coverage.
Speaker Change: Keep in mind that the triple net leased assets are the smallest segment within our portfolio. So any impact will not be significant.
Speaker Change: In our managed segments comprised of trilogy and shop, our expectations for 2025 are that supply and demand fundamentals along with our operating capabilities should support another year of double digit same store NOI growth. We believe that the landscape for long term care has never been better and we expect NOI growth in 2025.
Speaker Change: Will contribute to strong earnings per share growth.
Speaker Change: Collectively our outlook for same store NOI growth and the completed or announced investment activity translates to double digit <unk> per share growth in 2025 as compared to 2024.
Speaker Change: We are issuing guidance of $1 56 to $1 60 of.
Speaker Change: <unk> per fully diluted share for full year 2025.
Speaker Change: <unk> guidance does not assume any additional capital markets or transaction activity beyond what we have already announced although it does include the effects of the dispositions of lower growth assets. We closed in the fourth quarter of 2024, and a significant improvement to our leverage ratios.
Our operations and investments teams are continuously evaluating assets across our portfolio predominantly outpatient medical as potential candidates for disposition.
Speaker Change: As always our appetite for continued dispositions will be driven by pricing as well as the effect on the remaining portfolio from selling a particular asset or portfolio.
Speaker Change: During 2024, we recognized approximately six cents per fully diluted share of non core earnings and I anticipate that number will be lower in 2025.
Speaker Change: Now turning to our capital markets activity in the fourth quarter, we raised approximately $121 million through our recently initiated ATM program at a weighted average price of $28 five per share.
Speaker Change: Those funds were used to pay down outstanding debt, creating capacity for our announced 2025 investment and development funding.
Speaker Change: As Danny mentioned, the significant organic growth in our portfolio and capital markets activity, which included raising nearly $1 $4 billion of equity in 2024 reduced our net debt to adjusted EBITDA ratio by more than four turns from eight five times at the end of 2023 to four three times at the end of 2002.
Speaker Change: 94.
Speaker Change: Our strong balance sheet affords us the ability to take advantage of any new opportunities that we uncover we remain disciplined in our capital planning building on the success. We had this past year and positioning ourselves to continue to capture growth in the attractive long term care environment within health care real estate.
Speaker Change: That concludes our prepared remarks, operator, we're now ready to open the line for questions.
Speaker Change: Thank you we will now begin the question and answer session. Once again, if you are dialed in and would like to ask a question that is depressed star one followed by the number one on your telephone keypad. If you would like to withdraw your question simply press Star one again.
Speaker Change: I called upon to ask a question in or listening via loud speaker on your device. Please pickup your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: We ask that you limit yourself to one question and one follow up afterwards, you may add yourself back to the queue for any additional questions. Thank you. Your first question comes from the line of Throttled Camden with Morgan Stanley. Please go ahead.
Throttled Camden: Hey, just two quick ones I guess I'd love to hear what you're seeing in terms of the trends in January and February so far.
Speaker Change: And the reason I asked that is because when I think about sort of the deceleration.
<unk> baked into the same store NOI guidance I guess I'm just wondering.
Kevin: Is something sort of that you're seeing leading to that is it conservatism just what was the thought process in that and that number Kevin.
Speaker Change: Guys exceeded last year by quite a bit.
Danny Pruski: Alright, so I'll start with that one this is Danny speaking so.
Danny Pruski: A lot of things I think there's a lot of moving parts there, but I think answered your question.
Danny Pruski: I would say.
Danny Pruski: Youre looking at trilogy for example, I think we're expecting necessarily not to seek growth in NOI between Q4 and Q1.
Danny Pruski: Although Q1 2025 will obviously be much higher than Q1 2024, there are several things affecting that I think number one just the fact that you've got 14000 employees and you see a reset on employer FICA for example.
Danny Pruski: The fact, the first couple of months of the year, you've got higher utilities in the winter, which is always to be expected that this is a trend that we've seen for years, where Q1 tends to be kind of flat over Q4, and then growth throughout the year year in year out I think we the last few years. He had COVID-19 recovery. So it wasn't as pronounced but we're kind of we're kind of going back to work.
Danny Pruski: We were beforehand.
Danny Pruski: I think youre seeing the same issue.
Danny Pruski: We saw before Covid as far as occupancy we've seen really strong occupancy growth on the skilled side during January and February I think a lot of it has to do with the flu season, we're shop has been.
Danny Pruski: Dropped slightly as we've seen in years past.
Danny Pruski:
Danny Pruski: So I think that's that's as far as quality specifically.
Danny Pruski: As far as kind of where we see operations. So far this year replaced I mean.
Danny Pruski: We it's only been a it has only been a couple of months and of course February hasn't even ended so we don't have February numbers, but so far so good we're happy with what we've seen so far this year as far as our budget and our forecast.
Danny Pruski: Do you want to add Brian, Yes, I'll listen just to put it into context, a couple of things. We grew our shop occupancy by 600 basis points in 2024, I don't think anybody here thinks we're going to grow shop occupancy by another 600 basis points.
Brian: That's definitely going to be part of it the other thing to keep in mind is that our RIDEA occupancy is ahead of our peers.
Brian: <unk> Occupancies, so all those things sort of contribute to 2025 being a.
Brian: By all measures a great year of same store expectations for our for our growth, but at the same time lower than it was in 'twenty four.
Great.
Speaker Change: My second question was just on the acquisition pipeline I know you talked about the $71 million.
Brian: That you are looking at which is great.
Brian: But just can you give us a sense of.
Brian: What that pipeline actually sort of looks like the amount of deals that you're looking at.
Brian: Just to get a sense of how much product as possible.
Brian: And in this environment for you guys. Thanks.
Brian: Yes, I would say that the pipeline right. Now this is a very robust I mean, we have been very active over the past.
Brian: A few months in looking at potential new opportunities.
Brian: And we have been working very closely with our operators and identifying.
Brian: The opportunities that will be a best fit for the portfolio.
In terms of the pipeline.
Brian: Size I mean, I think we're seeing that grow and it's definitely more.
Brian: More significant than it was at this time last year.
Brian: So I think there are plenty of opportunities out there for us to too.
Brian: Underwrite and to participate in.
Brian: Alright, that's it for me thank you.
Brian: Okay.
Speaker Change: Your next question comes from the line of fire El Granite with Bank of America. Please go ahead.
Brian: Apparel.
Speaker Change: Hi, good afternoon, thanks for taking my questions.
Speaker Change: I wanted to ask about specifically when youre thinking about the tipping point of occupancy and I know you've kind of alluded to it in the previous answers.
Speaker Change: Specifically in trilogy one.
Speaker Change: Are you thinking about the tipping point of occupancy and when you can really start pushing rate and really start seeing that margin expansion I think I'm looking at the numbers now seeing that we're already seeing it kind of in four Q, what would you be thinking about going forward.
Speaker Change: Yes.
Speaker Change: If you look at where occupancy is today, it's well above where it was pre COVID-19 levels and I think we're already at the point now where we're able to increase rates at a pretty good clip.
Speaker Change:
Speaker Change: What we're looking at pretty strong increases this year.
Speaker Change: Yeah.
Speaker Change: We're very comfortable.
Speaker Change: Where we are but we think it's going to keep going up keep in mind that you got to split it up with trilogy, you've got the <unk> component of the Al IL component, which I think is very similar to what you see across the industry and that right now is in the high eighteens it's gone up a lot and we expect it to keep going up over time going back to everything we've said as far as the demand drivers lots of new.
Speaker Change: Demand very little new supply.
Speaker Change: The post acute care on the skilled side, they're right around 90% today, which is higher than anyone else that I've seen.
Speaker Change: Yes, there is room to continue growing that but just keep in mind. Their model is really a short term stay much more Medicare private pay private insurance much less Medicaid so theyre always going to want to have beds available to bring a new residents who are coming out of the hospital setting.
Speaker Change: We didn't want them at 98%, we always wanted to have we want to be able to accept those higher paying Medicare patients. We want make sure we have beds available.
Speaker Change: So I really think that can.
Speaker Change: Can we continue to raise the skilled nursing occupancy within trilogy, yes, but we don't I don't know I don't think.
Speaker Change: We wanted to do so we're very comfortable in the low nineties.
Speaker Change: And I guess also a follow up on that and you made.
Speaker Change: For opening remarks about Medicaid exposure can you give a little bit more color on how youre thinking about it and again specifically in the <unk> more on the operating exposure that you have how do you think about what potential.
Speaker Change: Impact could be on the worst case scenario with major cuts across Medicaid are even more limited.
Speaker Change: You could see that impacting and if you're hearing anything from your operators, yes, So youre right to focus on trilogy, because looking at our portfolio really the portfolio that had the most Medicaid exposure I believe it's about 97% as the one we sold back in December that was the skilled nursing portfolio in Missouri, and one of the reasons, we decided to sell it.
Speaker Change: Is of course, we started that process way before the election and before I knew this became an issue, but just from a quality perspective. They were older assets. They were smaller more rural less growth Jeff.
Speaker Change: Assets that we didn't feel met the overall criteria.
Speaker Change: Portfolio is and where we want to continue to be so looking at what we have left really.
Speaker Change: From a Medicaid perspective, it's really just the trilogy and trilogy is exposure, it's pretty low.
Speaker Change: It's about 21% of the portfolio and it's been shrinking by design over time as we continue to expand the al IL and.
Speaker Change: And Medicare portion of trilogy, but the way I'd answer. The question is really in three parts. So number one we don't know what's going to happen.
Speaker Change: Anybody who says they can predict what's going to happen with Medicaid I don't think it is telling the truth who knows.
Speaker Change: You can listen to the same politicians at the same day and they'll say two different things so.
Speaker Change: Is there a chance will be some changes, yes, I think there is but we don't know what those will be done.
Speaker Change: Two I believe that if there are adjustments to Medicaid and it's much more likely to be affecting those who benefited for the Medicaid expansion for example, maybe reduce eligibility.
Speaker Change: Work requirements et cetera, I think that's much less likely to see to see any effect on Medicaid reimbursements for long term care.
Speaker Change: I've been around 33 years in this business, we've seen what happens when they tried to cut skilled nursing reimbursements. It never ends up well and don't and typically those cuts need to be reversed.
Speaker Change: And number three really gone back to trilogy, they're.
Speaker Change: They are down to 21% of their revenue being Medicaid and as Gabe mentioned in his prepared remarks, they have a lot of levers that trilogy that they can pull there as they can if they determined that Medicaid reimbursements don't make sense, it's very easy for them to pivot and.
Speaker Change: And convert those rooms.
Speaker Change: Al memory care more Medicare beds.
Speaker Change: Trilogy, that's just not one of their focus and.
Speaker Change: Medicaid, it's really more of an accommodation to existing residents to where they take time out of.
Medicare or if they run out of money, we can move them into a Medicaid bad usually theres a wing that's Medicaid that has double occupancy rooms, it's not really a line of business that they focus on specifically, it's really it's really more of a.
Speaker Change: At accommodation to existing residents and if they need to shrink that business because the reimbursement isn't there it's very easy for them to do so.
Speaker Change: But I honestly don't think it I don't think it's going to come to that.
Speaker Change: Okay.
Speaker Change: Okay. Thank you.
Your next question comes from the line of Nick Joseph with Citi. Please go ahead.
Looking forward to seeing any grade.
Speaker Change: Oh, well, thank you Danny but it's actually graph on for NEC <unk>.
Speaker Change: Seeing you as well.
Speaker Change: Greg maybe just.
Speaker Change: Hello, maybe just getting back to kind of the opportunity set within trilogy, and the margin expansion and then gave I know you kind of touched on this during your prepared remarks, but you know as you kind of think about you know maybe the sniff portion of trilogy is getting closer to that terminal occupancy you've probably got some more room to run on on the <unk>.
Speaker Change: <unk>.
Speaker Change: Where could we see margins get to I realize that you know you're not giving guidance, but I would expect if you add on additional capacity with an al you add on some of these IL bill as it stands. The reason you should see the margin expansion in the future do I have that right.
Danny Pruski: This is Danny I'll start off and let Gabe chime.
Danny Pruski: If I Miss anything, but yeah, I think youre right as far as you know we've been increasing the al and IL component of <unk> business.
Danny Pruski: Every year in the nine years since we acquired trilogy. So I would expect that continuing to grow and that's going to have a positive impact on the margin. We're back up to I think around 19% in Q4, which is I think about where we were pre COVID-19, but.
But I expect it to continue to go up and that's going to be a function up number one as you mentioned, having more more al and IL number two we expect revpar growth to continue to exceed export growth across the entire portfolio, which I think is going to drive up margins everywhere not just of trilogy.
Danny Pruski: As far as opportunity to trilogy, I think beyond just the same store you've got.
Danny Pruski: Bunch of campuses that have opened up recently that have not yet stabilized now those margins don't show up in same store margins, but the overall margin I think you can continue to see improvement as assets.
Danny Pruski: I'll give it time to stabilize.
Danny Pruski: Other opportunities of trilogy that aren't necessarily margin related is we've got about we talked about the leased asset that we bought out that was about a 9% cap rate on our lease payment on an asset that we already operate and own. So there really is no underwriting risk there. There's a few more of those theres also some assets of trilogy manages.
Danny Pruski: But does not own whereas about dozen in total including the lease portfolio. So theres opportunities there to buy those out while we don't have any kind of below market purchase option on those like we've had on a lot of our assets in the past I think we still have a pretty good path to ownership on those.
Danny Pruski: And we have a good track record of buying those out just like the one we closed this week. So I think it can continue to see US go after those.
Danny Pruski: We are the logical buyer, we already operate them, we know them better than anyone else and we think we can acquire those at cap rates that are more attractive than anything else. We've acquired in the open market, okay or anything else you want to add about margin expansion there.
Danny Pruski: Just a couple of things.
One I think the demand is still coming everywhere and certainly add trilogy. Some of their buildings are operating at 99, or 100% occupied and al and not all of them are so I still think there's room to grow occupancy on the al side, certainly that trilogy. Once you get to you.
Danny Pruski: Kind of that mid <unk> range of occupancy you've got tremendous pricing power as well.
Danny Pruski: One of the things that we really like about trilogy is their focus on care has driven outsized demand for their product, which is why their occupancies are consistently running ahead of what the national averages and that same focus on care.
Danny Pruski: He is appreciated by the residents and the families that are considering their properties. So that strategy has been a winning one I think that strategy will allow them to drive rate further on the private pay side, both private pay al IL.
Danny Pruski: And also on the skilled nursing private day couple of other things that are more nuanced in the industry value based care still exists and is expanding in the skilled nursing setting, meaning the states are appreciating more and more every year that the good operators should be rewarded for.
Quality outcomes and trilogy is still hasn't.
Danny Pruski: Unlocked all of those value based care add ons.
Danny Pruski: You can see them continuing to manage to that to make sure of that.
Danny Pruski: Not just that the carriers there that it's reported correctly that you're capturing all of the necessary reporting and that you have seasoned into it long enough to unlock what those reimbursements are which by the way are are incredibly complex and is one of the reasons why trilogy scale and regional markets as important and valuable so they can manage through that.
Danny Pruski: The final thing.
Danny Pruski: I think could be good is on the Medicare advantage side. So what we saw in Medicare advantage more recently is trilogy, having high occupancies, having deep conviction in the value of the product that they are delivering and saying, we're not going to take reimbursement rate that is below a certain threshold rate.
Danny Pruski: So we will sit out of your program if necessary until you decided to pay us a proper value for a daily rate for the value that we're delivering more recently the Medicare advantage plans that trilogy deals with have realize that value and have stepped up.
Danny Pruski: To show a little bit of a willingness to pay a higher rate I think we can see rate growth there.
Danny Pruski: A little bit higher than what we're predicting currently as well so look.
Danny Pruski: Going back to my initial comments there are a lot of different ways that trilogy management services. Our operator, there can optimize the business. If all of them go right I think there's a chance for us to outperform where the guidance can be but I don't think it would be prudent to predict every single thing works out exactly right.
Danny Pruski: At this time.
Danny Pruski: Great guys Thats, that's certainly helpful context, and maybe switching back over to kind of the acquisition pipeline Stefan I'd be curious to get your insights you know in terms of the properties you're targeting it seems that they are more stabilized category fair to say that you know maybe going in yields are in the.
Danny Pruski: Low to mid Sevens with some kicker on top of that given the sharp component.
Danny Pruski: I mean I think.
Danny Pruski: Just generally speaking I think what we're seeing right now are yields that are somewhere between the mid six to eight range.
Danny Pruski: <unk>.
Danny Pruski: We are definitely targeting shop assets.
Danny Pruski: We think thats, where the best risk adjusted return is today and we.
Danny Pruski: We are.
Danny Pruski: Very active with our partners, our operating partners and trying to identify those assets.
Danny Pruski: In terms of.
Danny Pruski: Stabilized.
Danny Pruski: Certainly we're looking at stabilized assets.
But we're we're also looking at some potentially.
Danny Pruski:
Danny Pruski: Moderate value add type of assets.
Danny Pruski: We will also consider assets that maybe have some room to improve but we can we can acquire those at or.
Danny Pruski: Below market or I'm, sorry below.
Danny Pruski: Our replacement cost price.
Danny Pruski: So I mean, we're looking at a wide range of of property.
Danny Pruski: Property types are immune properties in.
Danny Pruski: It's really all a matter of does it fit within the portfolio does it fit within the geographic.
The footprint of our existing operators and are they going to be assets that we think can be long term holds that are going to perform well.
Danny Pruski: I'd also mention that we are probably more focused on the assisted living and memory care.
Danny Pruski: Side of the shop portfolio then.
Danny Pruski: Maybe the IL side.
Danny Pruski: Not to say that we wouldn't.
Danny Pruski: Look to acquire IL, but I think.
Danny Pruski: We have a good group of operators that.
Danny Pruski: Do very well on the higher acuity.
Danny Pruski: Level of.
Danny Pruski: Senior housing and are a good fit for our portfolio going forward.
Danny Pruski: And everything that we're looking at is really things that we can do to continue to build on the quality of our portfolio today.
Danny Pruski: Great. That's it for me thanks for the time.
Speaker Change: Thanks Ralph.
Speaker Change: Your next question comes from the line of Michael Carroll with RBC capital markets. Please go ahead.
Speaker Change: Mike.
Hey, Thanks, guys can you provide some details on how many trilogy developments and expansions that you completed in 2020 for I guess, maybe what's in process right now and the guidance that you've quoted in the call about how many you plan on starting on 25 is that an uptick of what you did in 'twenty four I guess, how should we think.
Speaker Change: That whole dynamic and how does that roll into earnings over time.
Speaker Change: Yeah. So we had quite a few we had more than the typical number open up in late 'twenty three 'twenty four I think we had.
Speaker Change: Three to five and probably 18 months period between summer of 'twenty three at the end of 'twenty four.
Speaker Change: And then.
Speaker Change: We only launched one new project in 2024, which I don't not sure. We'll even open until early 2026 and of course, we announced two new ones that we approve that will start construction. This year. So we had a lot of open last year.
Speaker Change: We will have quite a few projects that will open this year in expansion, but as far as new campuses I don't think we have another one opening up to the first part of next year.
Speaker Change: So there is about $50 million of starts that were in 2024 as I mentioned it was we only had one new campus and then a bunch of expansions, we've announced the $136 million for 2025. So far that includes two new campuses quite a few developed projects and some expansions as well.
Speaker Change: I really think just on a on an annual go forward basis two to three campuses is probably the number of starts are going to see going on.
Speaker Change: Year on year out.
I think 24 was light because 23 was so heavy as far as new campuses.
All in I think it is.
Barry: Barry about $150 million a year is probably a good number of years, it's kind of estimated annual number of new constructions.
Barry: Each year, including new campuses villas and expansions and just a small point of clarification, Mike when we put in our guidance. The development spend that's just what we anticipate spending on everything that Danny just mentioned in 2025 and that guidance was $80 million to $100 million alright.
Barry: Yes, Okay got it and then can you remind us once those assets are completed I guess is there are initial cash drag once those buildings are completed I mean, how long are you assuming it takes for them to stabilize and then or is it going to be stabilizing at those double digit type yields well it depends on the project so and expansion.
Barry: It's usually only gone on a campus this fall and it has a waiting list those usually fill up very quickly.
Barry: Yes, the expansion could be adding 810 or 12, new rooms onto an existing Wang and you only have to do that if there is demand for it so let's fill up fast statement of pellets those are typically pre leased.
Barry: So they usually fill up almost as soon as they're done now the new campuses take longer obviously in the past we've looked at.
Speaker Change: Two and a half three years to fill up a new campus. Okay. What's typically happened as the skilled nursing side goes up faster and then it's Gabe mentioned in his comments one of trilogy strategies is to use the skilled residents kept felt the al and IL.
Speaker Change: What we've seen the last few that have opened is that seems to be actually kind of switching a little bit the Allen I outside because of the demand because of lack of new supply that actually seems to be filling up even faster than the skilled side. So I really think that the two and a half to three year time period that it used to take trilogy, I think thats getting compressed and I.
Speaker Change: I think youll see that be more kind of 12 to 18 months to follow up on your campus yields on those are typically on a stabilized basis on a new campus is probably low double digit.
Speaker Change: Whereas.
Speaker Change: Pellets are probably high single digit.
Speaker Change: And our campus expansion, which is like an addition or something like that.
Speaker Change: Turning to an existing weighing those are mid teens, but they're very small right now one of those projects could be.
$1 5 billion Theyre not big project.
Speaker Change: Okay and those ground up stay initially are losing money and once they are completed is that fair, yes, Yes day, one when they open up there's no residents and it's.
Speaker Change: It's always going to take time, even on the skilled side, which tends to fill up faster.
Speaker Change: Licensing period, especially some states it's longer like Michigan takes longer than some of the other states. So theres always going to be a period of time it could be three months, where you need to get your Medicare Medicaid license.
Speaker Change: And then it will start filling up so it's always going to start its never going to empty its always could open up with zero residents.
Speaker Change: Okay, great. Thank you.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Austin <unk>.
Speaker Change: Keybanc capital markets. Please go ahead.
Speaker Change: Hey, good morning, everybody.
Speaker Change: I think Danny referenced sort of flattish NOI from from <unk> to <unk> within trilogy for some of the seasonal factors that you. All highlighted are there any other seasonal considerations included in guidance that could impact the sequential growth through the year and sort of cadence of NOI. After you get through the first quarter.
Speaker Change: Anything that I missed.
Speaker Change: No I think I think.
Speaker Change: Kind of delineated a little bit of headwinds in Q1, it's obviously, there's fewer days.
Speaker Change: Increased utility costs scheduled weather and then the final one is.
Speaker Change: A reset on some of the taxes.
Speaker Change: Such a heavy labor component in the skilled nursing business.
Speaker Change: That ultimately if your if your employer taxes reset it can show up in numbers and a headwind in 2000 and in the first quarter.
Speaker Change: I can't think of anything necessarily beyond that.
Speaker Change: <unk>.
Speaker Change: Yes, that's about it yeah just.
Speaker Change: Just having 90 days in Q1 versus 92 in Q4 that alone.
It's material.
Speaker Change: No no no that makes sense, just trying to understand flattish NOI seems about right or even a slight dip it seems like that need.
Speaker Change: There is little sequential improvement necessary to hit the midpoint of our guidance within.
Speaker Change: On the same store growth assumed for trilogy.
Speaker Change: Secondarily wondering when you look out over the next 12 months to 24 months with some of the staging of the expansion opportunities.
Speaker Change: And any other kind of activity within development. That's happening how you would expect the senior housing versus sniff that component to how that ratio to change.
Speaker Change: Over the next one to two years.
Speaker Change: In the last nine years, it's been a slow and steady progression.
Speaker Change: We bought trilogy.
Speaker Change: I can tell you. This is the best of my recollection I believe it was about 58% skilled beds.
Speaker Change: Close to 60%, maybe 40% to 42% al and IL and I believe they are getting close to 50% now.
Speaker Change: And it's a slow progression because if you look at it if you go back to the trilogy campuses of all I mean, when they started out 25 years ago, They were 100% skilled nursing so.
Speaker Change: A lot of those campuses have been expanded or sold off but.
Speaker Change: Over time and what happened was is that.
Speaker Change: As the CEO at the time, Randy Buffered realized hey, we're basically.
Speaker Change: Taking these patients on a short term basis, and then move on and maintain a al or IL. After the fact with some other operator why don't we just do that ourselves that's kind of all the whole thing started whereas the.
Speaker Change: The typical model once they start if they win that was a 100 units call. It 58 to 60 might be scaled in the other 40% to 42 would be a al. This is before they even did IL a typical new campus today, it's going to be larger and usually they are about 125 units and there call. It 50.
Speaker Change: Maybe 55 scaled and then another <unk> <unk>.
Speaker Change: 70, or so <unk>. So just that alone is continue to reduce that exposure to increase the <unk> component and reduce the skilled nursing component and then you add on the villas and it does even more so.
Speaker Change: It's a slow and steady movement every time, a new campus opens.
Speaker Change: Warren expansion is really helpful. Yeah, that's helpful context.
Speaker Change: We expect the NOI differentials, even greater given the margin.
Speaker Change: The difference between the two.
Last one for me was you guys had the opportunity to decrease leverage or some some ATM issuance in the fourth quarter and kind of expand that available dry powder.
Speaker Change: I think you may still have some expensive trilogy debt.
So just wondering if theres additional opportunities to deleverage and build additional capacity given the runway for new investments, but at the same time.
Speaker Change: Just yes.
Speaker Change: Drive some interest expense savings over time thanks.
Speaker Change: So the majority of the expensive debt at trilogy has already been paid off at this point.
Speaker Change: She is a pretty big user of HUD debt.
Speaker Change: Which is quite attractive we've got.
Speaker Change: Have about.
Speaker Change: $700 million of HUD debt at a coupon of 366.
Speaker Change: Stuff's going to be there for a while it's got long duration on it as well. So so really the low hanging fruit on debt pay downs is kind of behind us.
Speaker Change: We do have a revolver, which might be in the high 5% range. So it's definitely a lot less attractive than it was when we had a lot of those expensive pud alright.
Speaker Change: Alright, skewed extensive fixed secured debt at children.
Speaker Change: I mean listen we're really very judicious.
Speaker Change: We fought really hard to get our debt to EBITDA down to four three times and I think we're quite pleased with it there.
Speaker Change: And we're going to we're going to maintain it around that level.
Speaker Change: Really.
Speaker Change: Ultimately, we will have external growth this year, we've announced guidance for $86 million. That's things that went under contract that will close either have closed already or will close in the first quarter.
Speaker Change: Beyond that.
We're we're.
Speaker Change: As I say going to be very judicious about additional leverage and any.
Speaker Change: Any additional ATM issuance.
Speaker Change: Very helpful. Thanks, everybody.
Speaker Change: Your next question comes from the line of Michael Australia Green Street. Please go ahead.
Speaker Change: Hey, Thanks, and good morning, Hey, guys.
Speaker Change: Maybe going back to your comments on the levers that <unk> can pull in the event that they want to move away from Medicaid a bit what's a reasonable floor in terms of percentage of revenue coming from Medicaid that trilogy could actually get to.
Speaker Change: Yes.
Speaker Change: That's a tough question I mean, I think you definitely bring it down.
Speaker Change: So as you can say hey, we're getting out of the Medicaid business and if you are in one of our facilities and you need to move to Medicaid you've got to move out and you've got to go somewhere else.
Speaker Change: I don't necessarily think that is maybe the best way for them to run their business.
Speaker Change: That may not be very popular.
Speaker Change: So they can definitely reduce it.
Speaker Change: It would have to they would have to be some massive cuts the Medicaid to where I think we'd make a decision just to get out of it completely.
Speaker Change: Never say never.
Speaker Change: But I think that.
Speaker Change: It's a good accommodation to half and and and some of the states, it's actually a pretty good line of business. So.
Speaker Change: Could it get down to zero, maybe but I don't know necessarily want to Gabe anything it's really hard to predict yes from let's talk let's break it down a little bit from a physical plant perspective, they could go to zero. The physical plant is still to have a quality.
Speaker Change: By design, so that they've got total optionality in every wing in the building to pivot from skilled nursing to assisted living and memory care. So they've got maximum flexibility on which line of business they want to be in and by the way they do pivot.
Speaker Change: Even.
Speaker Change: Outside of these kind of macro conditions and reimbursement issues kind of micro conditions market specific issues dictate demand, sometimes and it's one of the reasons why we like developing through trilogy, because you can.
Switch the bed mix and add Medicare excuse me memory care beds, where needed so from a physical plant perspective, and the answer is they could they could go for al if they wanted to.
Speaker Change: And it's a high enough quality to get people into those beds as well, where they want it and the care is at the right level I think what Danny said it.
As is spot on you'd have to start balancing where the value of this is even a loss leader for trilogy, where people know that they've got a place to stay forever and they are not going to get kicked out on the street.
Speaker Change: That being said I think.
Speaker Change: One more comment on the Medicare cuts in the skilled business industry that that industry operates at pretty thin margins already.
Speaker Change: If you're a primarily Medicaid skilled operator, right now I don't think Theres a lot of profit to cut out.
Speaker Change: Thank you.
Speaker Change: I think certainly the number of beds in the skilled in.
Speaker Change: The skilled nursing industry would decrease with significant Medicaid cuts in that industry over the long term that would obviously dramatically decreased access to care for people in all these states, which I think would cause quite an uproar.
Speaker Change: But also if youre looking at it from our business perspective, probably trilogy is not going out of business. When we have we're not going to have the same issue. So there is the opportunity to capture market share I think we're pretty insulated from these costs just to rephrase that if Medicaid reimbursement gets to the point, where trilogy says we need to get out of this business completely we're going to be talking about.
Some other stuff in this space because that means that you're going to have a bunch of facilities shutting down had masked because of it.
Speaker Change: I mean, you've been around long enough to see what happens right. It's a lot. Most of them are skilled business is very low margin relies heavily on Medicaid and you cut the rates even slightly in that margin goes from.
Speaker Change: Goes to negative very very quickly so.
Speaker Change: That's why I believe that there's just a limit to any potential Medicaid cuts because you just can't do it because the business will just won't survive.
Speaker Change: So and as Gabe mentioned trilogy is going to survive Fi trilogy is going to be okay.
Speaker Change: The rest of our skill sets us thats really going to suffer the ones that rely on longer term longer longer term Medicaid residents that I don't know how they make it.
Speaker Change: Got it yes, that's helpful.
Speaker Change: And then maybe one question on the outpatient business.
Speaker Change: Where do you expect occupancy to trough that within your portfolio and are there any additional known move outs happening. Maybe later this year that could weigh on NOI growth.
Speaker Change: <unk> 2026 as well.
I expect occupancy to remain kind of where it is in the high eighties, what we've seen with outpatient medical for the last few years.
Speaker Change: Did great during COVID-19 without when the health systems, we're expanding but what we basically seen is kind of one step forward one step back as you know there's a lot of activity.
Speaker Change: Lots of tours, we are signing new leases, but for every big new lease that you side you have a health system lease, which is really the dominant tenancy in the outpatient medical space today, where the lease is up in the hospital looks at their options and says Hey, I've got a 40000 foot lease that's expiring, but I was wondering <unk> 20000.
Speaker Change: Because I can I can move some of these doctors to other spaces and thats kind of been the name of the game for the last couple of years, which is why our occupancy has kind of held pretty steady our same store NOI growth has been pretty flat.
Speaker Change: And I think we're going to see more of the same in 2025, we do have a couple of leases that we know of I think later in the year, where the hospital system has already indicated they are not likely to renew all of their space.
And then you offset that with new leasing that we know about and it kind of keeps us where we are today.
Speaker Change: Pragmatic standpoint, I think that we've got some explorations.
Speaker Change: We're typically out talking to these tenants at least two years before their lease expires.
Speaker Change: And they'll typically if they are moving out they'll have a pretty good sense that thats going to happen. So we've got some explorations that are happening starting in April and ending in November better chunky and that we already we already know that they are likely not going to renew and we've known that and we've worked that space and we're continuing to try and backfill.
Speaker Change: Yes.
Speaker Change: Speak to an actual trough trough.
Speaker Change: I'd say its probably late Q2, maybe in Q3 at some point.
Speaker Change: But keeping in mind, we have had time to lease and we have additional time to lease before those things are truly given back.
So the team continues to work those and endeavor to tobacco and what we've seen more than once is you'll be out in front of the tenant talking them a couple of years before their exploration and it'll be someone at the local hospital, who handles our real estate, saying, yes of course, we look we need the space We'd love. This space and then you know when you're nine months out Theres a mandate from <unk>.
Speaker Change: From corporate from the system, Hey, you need to cut your G&A and that's oftentimes. They are the ones that are driving the decision as opposed to the local hospital would really like to keep it.
Speaker Change: That's helpful. Thanks for the time.
Speaker Change: As there are no further questions at this time I would like to turn the call back over to them Danny Pruski for closing remarks, alright. Thank you very much operator, thank you for everybody joining us on the call I want to thank the entire HR team.
Speaker Change: And a lot of operating partners, who are on the call today I mean, if you look at our guidance for next year.
Speaker Change: We are guiding towards 12%.
Speaker Change: Per share NOI growth I'm, sorry, <unk> growth.
Speaker Change: Next year, which if you look at our earnings growth that we're guiding to fix at the NOI growth that we're guiding to and can you compare us to our peer set we are at or near the top.
Speaker Change: On all of those metrics. So that's really due to all the hard work for everybody here at corporate as well as around the country.
Speaker Change: Yeah.
Speaker Change: We couldn't do it without everybody everybody's helps I want to just thank everybody for that and thank all of you for taking the time to.
Speaker Change: With us on a Friday morning, Thank you.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].