Q1 2025 American Healthcare REIT Inc Earnings Call
Kate: Thank you for standing by. My name is Kate and I will be your conference operator today. At this time, I would like to welcome everyone to the American Healthcare REIT Q1 2025 Earnings Conference Call.
Speaker Change: Good morning, Thank you for joining us for American Health care REIT first quarter 2025 earnings Conference call with me today are Danny Prostie, President and CEO gave wilhoit, Chief operating Officer, Stephane, <unk>, Chief investment Officer, and Brian <unk>, Chief Financial Officer on today's call Dani Gabe Stefan and Brian will.
Speaker Change: Provide high level commentary discussing our operational results financial position changes related to our increased 2025 guidance and other recent news relating to American health care REIT.
Speaker Change: Following these remarks, we will conduct a question and answer session. Please.
Speaker Change: Please be advised that this call will include forward looking statements. All statements made during this call other than statements of historical fact 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. Therefore, you should exercise caution in interpreting and relying on them I refer you to our SEC filings for a more.
Speaker Change: Detailed discussion of the risks that could impact our future operating results financial condition and prospects.
Speaker Change: All forward looking statements speak only as of today may nine 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. During the call. We will discuss certain non-GAAP financial measures, which we believe can be useful in value.
Speaker Change: Waiting the company's operating performance.
Speaker Change: These measures should not be considered in isolation or as a substitute of our financial results prepared in accordance with GAAP reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable measures calculated in accordance with GAAP are included in our earnings release supplemental information package and our filings with the SEC you can find these documents as well as an Audi.
Speaker Change: A webcast replay of this conference call on the investors relations section of our website at Www Dot American health care REIT Dot com with that I'll turn the call over to our president and CEO Danny proxy.
Danny Proxy: Thanks, Alan and good day, everyone and thank you for joining US today, let me begin by stating how proud I am of the team here at HR as well as our operating partners for kicking off 2025, with such strong results, particularly within our operating portfolio.
Danny Proxy: These results are a direct outcome of our unwavering focus on delivering high quality care and facilitating better health outcomes across our campuses in properties. This.
Danny Proxy: This combined commitment continues to drive consistent and sustainable financial performance as I've shared in the past. This commitment to care is the primary goal for all of US here at HR and it is embedded in every decision we make and every partnership we establish this week, we held our annual operators summit here in southern California and were.
Danny Proxy: Together to share best practices as well as to continue to reinforce our emphasis on quality care quality outcomes resident satisfaction as well as employee retention and satisfaction in our buildings.
Danny Proxy: During the first quarter, we delivered strong operational performance and successfully executed accretive capital allocation initiatives.
Danny Proxy: Our capital markets activity in the first quarter further strengthens our company's financial position and supports our planned external growth for this year and beyond.
Danny Proxy: Congratulates to fund and the rest of the investments team for compiling a pipeline of well over $300 million of acquisitions that we expect to close before year end, which is in addition to the assets we have already closed on so far this year.
Danny Proxy: Looking at performance across our diversified healthcare portfolio, we achieved 15, 1% same store NOI growth year over year in Q1 2025.
Danny Proxy: This growth was led by our operating portfolio, which includes our integrated senior health campuses, which we also refer to as trilogy as well as our senior housing operating properties or shop segment.
Danny Proxy: As described in last quarter's call, we anticipated the colder winter months and a flu season might modestly weigh on first quarter growth.
Danny Proxy: However, the diversification within our operating portfolio, including properties in campuses, serving a variety of long term care needs proved to be a positive force. During this typically slower growth period.
Danny Proxy: Most acute skilled nursing settings within trilogy performed particularly well and due to the strong performance. We are increasing our full year same store NOI growth expectations for the trilogy segment.
Danny Proxy: As we move into the warmer spring and summer months, our teams and operating partners are well positioned to capture growing demand for assisted living care within our markets. We expect continued growth across the operating portfolio throughout the rest of the year and we've already seen a sharp uptick in move ins since the end of Q1.
This occupancy trend as well as strong improvements in Revpar and margins allows us to increase full year 2025 guidance for our shop segment as well.
Danny Proxy: It is our long term view at the senior housing industry is benefiting and should continue to benefit from a multiyear tailwind of favorable fundamentals.
Danny Proxy: On the capital allocation front, our investments team is actively identifying new growth opportunities with our existing operating partners as well as identifying new prospective operating partners that will complement our current regional operator base.
Danny Proxy: These new partnerships will allow us to maintain our strategic focus on working with market leaders in the communities they serve.
Danny Proxy: At the same time, they expand our opportunity set while preserving our hands on asset management approach to drive strong performance across our operating portfolio.
Danny Proxy: Stephane will provide more detail on some of the promising new relationships we've been cultivating.
Speaker Change: Finally, as a result of a conducive capital markets environment, we source attractively priced capital utilizing our ATM program in Q1 2025.
Speaker Change: As of the end of the quarter, our net debt to annualized adjusted EBITDA stood at four five times.
Speaker Change: The financial capacity, we built over time will continue to support our development initiatives and enable us to execute on the new shop acquisition opportunities that our team has and will continue to unlock.
Speaker Change: Before I turn it over to the rest of the team I'd like to once again, thank everyone at HR and our partners for their outstanding execution. During what we expect it to be a more turbulent winter season. These.
Speaker Change: These results are a testament to the hard work you all put in to ensure we provide the highest standard of care that we can to the individuals and families who trust us with their care.
With that I'll turn it over to Gabe to walk us through our operational results in more detail.
Gabe Wilhoit: Thank you Daddy Q1, 2025, with a very strong quarter for performance across our portfolio as we delivered sector, leading same store NOI growth for the fifth consecutive quarter NOI growth compared to the first quarter of 2024 was led once again by our operating portfolio segments of trilogy, and shop, which posted another quarter of growth exceeding 20.
Gabe Wilhoit: <unk> collectively year over year same store NOI growth increased by 19, 8% at trilogy, and 37% within shop in Q1 2025.
Gabe Wilhoit: That strong growth was driven by a combination of things occupancy gains mid single digit revpar in average daily rate growth and disciplined expense control.
Gabe Wilhoit: <unk> campuses and their unique business model. Once again proved the merits of operating various long term care settings at scale within their five state footprint.
Gabe Wilhoit: Because trilogy facilities provide care to seniors at all acuity levels Triologies integrated senior house campuses more than any other asset type benefit more broadly from the secular demand wave of the aging population.
Gabe Wilhoit: So for example, when we saw some softness in assisted living demand last quarter due to a particularly difficult flu season trilogy experienced a corresponding increase in skilled nursing demand for seniors and a net increase in occupancy as a result.
Gabe Wilhoit: We see this capacity to dynamically meet the evolving care needs of seniors as a major advantage of the trilogy model that adds meaningful value and improves resident and outcomes.
Gabe Wilhoit: And in the first quarter strong performance in the skilled nursing setting drove compelling growth at <unk> in the aggregate.
Gabe Wilhoit: We also continue to see trilogy benefit from its multiple levers for sustained growth.
Gabe Wilhoit: Not only did we realized the occupancy gains and strong revenue optimization, but we saw <unk> commitment to quality positively impact both Q mix and skilled nursing rates, which also led to strong financial results Joe.
Gabe Wilhoit: <unk> overall CMS five star rating is now over four on average and its quality rating is four eight which we believe are industry leading.
Gabe Wilhoit: These high quality ratings made them, an attractive option, especially for Medicare advantage plans that are now more than ever seeking quality operators.
Gabe Wilhoit: And in Q1, we were able to substantially expand our relationships with Medicare advantage plans at attractive rates, which should provide a powerful tailwind through 2025 and beyond.
Gabe Wilhoit: Our over 30% same store NOI growth in shop was once again sector, leading and was the result of several key strategies revenue.
Gabe Wilhoit: Our revenue management and optimization led to eight 8% year over year revenue growth and nearly 2% revenue growth from the fourth quarter of 2024, despite a slight sequential pullback in occupancy.
Gabe Wilhoit: The decline was in part due to a difficult flu season in our markets and also in part due to our commitment to revenue and expense optimization in the face of higher than normal involuntary move outs.
Gabe Wilhoit: And this is an important point.
Gabe Wilhoit: Growing occupancy will always be an important driver for our portfolio performance as I've said many times in the past, we don't want to make the mistake of myopically focusing on occupancy growth instead, we take a much more holistic approach with our operators always starting with quality of care first and also looking at other key drivers like rate ranked.
Gabe Wilhoit: Concessions referral fees and other factors that positively impact margin and ultimately NOI.
Gabe Wilhoit: That approach worked in 2024 and worked in Q1 2025, and we expect it to continue to work through the end of 2025 and beyond.
Gabe Wilhoit: As we enter the spring and summer selling season, we expect new move and momentum to continue in demand to ramp up in the coming months, allowing the shop segment to build on its solid foundation.
Speaker Change: Lastly, before I turn it over to Stephane as Danny mentioned earlier, we hosted our operators during our annual operators of it this past week and I came away tremendously proud of their commitment to the communities. They serve I am excited about the strength of our core regional partners as they build on our successful 2024 the initiatives in collaboration fostered at the summit give us great confidence.
Speaker Change: And making 2025, just as successful if not more so than last year.
Speaker Change: With that I'll pass it over to Stephane to share his thoughts on recent transaction activity in HRS investment efforts.
Stephane: Thanks Gabe.
Stephane: These first few months of 2025 have marked a robust period for deal activity.
Stephane: We successfully closed several recently announced investments and have developed a solid pipeline of future investments that we are well positioned to close out.
Stephane: During the quarter, we completed the previously announced lease buyout of a trilogy campus for approximately $16 1 million.
Stephane: Subsequent to quarter end, we closed on the acquisition of a $65 million shop community and the mid Atlantic region, which we had previously disclosed was under contract.
Stephane: Upon closing we transition the operations to heritage senior living one of our existing regional operating partners.
Stephane: Looking at more recent activity our investments team has remained focused on sourcing new opportunities as we reported yesterday. Our current pipeline consists of over $300 million of potential acquisitions that have been awarded to US all of which are in the operating portfolio segments.
Stephane: Although many of these are still early in the investment process. We are excited to share the progress we've made in unlocking strong opportunities to complement our portfolio with the quality of these potential acquisitions and the opportunity to establish new operator relationships with groups, we have known well for some time in the industry.
Stephane: Among the deals in our pipeline, we have been underwriting a few opportunities in collaboration with two new regional operating partners.
Stephane: Like our existing operating partners. They have all the qualities. We look forward our operators they are local market specialists, focusing on delivering high quality care and outcomes for residence. These.
Stephane: These relationships have been cultivated alongside our asset management team and are based on prior informal experience.
Stephane: If we close on these deals it would mark the first formal partnerships with these operators and would not only complement our existing operator group, but also widen the opportunity set that this expanded pool of partners will continue to expose us to.
Stephane: While we are not disclosing names at this stage, we look forward to sharing more details as these opportunities progress.
Stephane: Shifting to development, we started two new projects in the first quarter within our trilogy segment and expect to break ground on additional developments over the balance of the year.
Stephane: All projects currently in our pipeline remain on schedule and within budget consistent with our historical experience of developments trilogy.
Stephane: On the disposition front, we continue to recycle capital out of lower growth assets and segments.
Listening is to reallocate capital towards investments with more attractive risk adjusted returns within our trilogy and shop segments.
Stephane: During the quarter and subsequent to quarter end, we sold five properties for gross proceeds of approximately $40 million I'm incredibly proud of all that our team has accomplished in such a short period and look forward to unlocking even more opportunities through the remainder of the year.
Stephane: As always we remain disciplined and selective our underwriting continues to prioritize properties that aligned within our geographic footprint, operator model and long term return expectations.
Speaker Change: With that I'll turn it over to Brian.
Brian: Thanks, Stefan Q1, 2025 was another quarter of strong execution and demonstrated discipline from our organization.
Brian: During the quarter, we reported normalized funds from operations or <unk> of <unk> 38 per fully diluted share representing an increase of over 26% compared to Q1 2020 for.
Brian: This result was driven primarily by our operating portfolio, which represents 71% of our net operating income and includes trilogy and shop and further supported by our capital markets activity.
Brian: During the quarter, we raised approximately $48 million through our ATM program at an average price of $30 22 per share.
Brian: The strength and resiliency demonstrated by our portfolio during Q1 and the continued demand for our facilities and services drives are decision to raise our full year 2025 same store NOI growth targets and <unk> per share guidance.
Brian: This increase in guidance is supported not only by our Q1 results, but also by various kpis such as traffic leads and tours across our operating portfolio, suggesting demand is strong and our long term care sector and stronger than we had originally anticipated within our portfolio, which is appropriately positioned to cap.
Brian: That demand.
Brian: The continuing efforts of our regional operators in conjunction with our asset management teams drove impressive revpar growth of 6% in our shop portfolio. Despite a difficult operating environment in the first quarter brought on by seasonal headwinds not the least of which was a quite brutal flu season.
Brian: We're looking forward to improving Occupancies and net operating income growth throughout the remainder of 2025, and our trilogy and shop segments.
Brian: We are increasing our full year 2025 same store NOI growth targets for the total portfolio to a new range of 9% to 13% from our prior range of 7% to 10%. This increase is driven by higher expectations within our <unk> segment, where we are revising our same store NOI growth guidance upward to a range.
Brian: A 12% to 16% from our previous range of 10% to 12%.
Brian: Additionally, in our shop segment, we are increasing same store NOI growth guidance to 20% to 24% from our previous target range of 18% to 22%.
Brian: Guidance for our other property segments remains unchanged.
Brian: These changes in same store NOI growth guidance also dictate an increase to our <unk> per fully diluted share guidance, which we are raising by <unk> at the midpoint to a new range of $1 58 to $1 64.
Brian: From a prior range of $1 56 to $1 60.
Brian: Our guidance does not include any assumptions beyond what was disclosed in our earnings release last night in particular, it excludes the deals in our acquisition pipeline of over $300 million that.
Brian: We have been awarded since we are still early in the transaction process and cannot provide certainty around timing or execution yet.
Brian: For additional color, we believe that these acquisitions will close later in the year and we will only have a nominal impact on 2025 earnings are.
Brian: Our guidance also does not include any further capital markets activity beyond the ATM issuances already completed and our underlying assumptions.
Brian: Additional line item guidance details can be found in our supplemental disclosure document on our website or in the 8-K furnished to the SEC yesterday.
Brian: Finally shifting to the balance sheet, our net debt to EBITDA at the end of Q1 stood at four five times, we continue to manage debt levels with discipline and remain committed to sourcing attractively priced capital that supports long term growth and shareholder returns that being said our cash on hand future retained.
Brian: <unk> disposition proceeds and capacity on our line of credit are able to support our external growth targets, both from anticipated acquisitions as well as committed development activity at <unk>.
Brian: That operator, we're ready to open the line for questions.
Brian: Okay.
Brian: At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, we request that you limit yourself to one question and one follow up also youre welcome to re queue for additional questions. We will pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line of Sarah <unk>.
Speaker Change: <unk> of America. Your line is open.
Speaker Change: Apparel.
Speaker Change: Hi, good afternoon, Thanks for taking my question.
Speaker Change: My first one is on your pipeline can you give a little bit more detail on expected close.
Speaker Change: Where you are in various stages.
Speaker Change: Of that pipeline.
Speaker Change: Yes, so I think as you can understand we really only truly we're able to focus on external growth starting in the fourth quarter. So we've ramped up this pipeline pretty quickly.
Speaker Change: And that's basically generated what you've seen in the $65 million shop asset that we closed an additional pipeline of over $300 million.
Speaker Change: The timing of these.
Speaker Change: Transactions are going to vary quite a bit simply because the process does take some time.
Speaker Change: Some of them do have.
Speaker Change: Regulatory approvals that need to need to happen in <unk>.
Speaker Change: Also quite frankly.
Speaker Change: They're just it's a mixed bag of where they are in the process. So I would say generally speaking these.
Speaker Change: These transactions I think you can you can look at these as some of them as of late third quarter, but most likely fourth quarter close.
Speaker Change: And keep in mind Farrell that the pipeline isn't maybe how most people defined pipeline for US. These are assets that we have won the bidding is no longer continuing we are either under LOI or negotiating LOI or were actually under contract. So we certainly would have a higher certainty of close on this on.
Speaker Change: What we call pipeline nothing is guaranteed obviously, if we uncover something during diligence we could potentially work if we can't get regulatory approval, we would walk, but ultimately we feel pretty good about this pipeline.
Speaker Change: Great. Thank you and my second one is about your MLP or in your Triple net portfolio. How are you generally thinking about that just given the yields that you are able to receive on the more operating portfolio I guess just longer term your strategy.
Speaker Change: Yes. This is Dan I'll answer that one so the size of those portfolios has been shrinking over the last several years, we made a conscious decision to call our mob portfolio, probably over three years ago.
Speaker Change: Recognizing that we're going to see better risk adjusted returns and long term care. So we have been selling off kind of our non core non strategic mlps for a few years and I believe where we had about 110 of them Peter's ago now we're kind of in the Eighty's. So youll continue to see us do that.
Speaker Change: Mostly smaller buildings off campus the ones, we're less excited about holding long term.
Speaker Change: Overall, it's not like we disliked the mob space, we just favor senior housing right now is that just where the better risk adjusted returns are in the triple net side.
That segment of the business has been shrinking as well.
Speaker Change: It is not.
Speaker Change: It's not like we have anything particularly against Triple net leases frankly, if the right opportunity came along for triple net lease we'd consider it that being said.
Speaker Change: We had one large portfolio that we made decision to sell last year, because we felt it was higher risk.
Speaker Change: But if you look at what's in that what's left today, it's well below 10% of our NOI. We've got great tenants. Good coverage, we're not actively looking to sell anything there, but if somebody came along and made a great offer we'd consider it.
Speaker Change: But clearly the growth is going to be in our operating portfolio, which is now as Brian mentioned, well above 70% of our NOI and climbing.
Speaker Change: Great. Thank you so much.
Speaker Change: Thank you. Your next your next question comes from the line of Austin with Bruce Smith with Keybanc capital markets. Your line is open.
Austin: Great Hey, good.
Speaker Change: Everybody.
Speaker Change: Just wanted to circle back on the investment pipeline and I was wondering if you could share some additional details around how many deals are in the pipeline how competitive the process was in order to win these deals and then just anything around economics that you can share at this point. Thank you.
Speaker Change: Sure I'll start that I actually have that in front of me. So I'll take that one this is danny so.
Speaker Change: As we mentioned the pipeline is well north of $300 million.
Speaker Change: It is a mix of shop and trilogy more shops in trilogy.
Speaker Change: Almost all newer buildings the vast majority I think with exception of two have been built in the last 10 years.
Speaker Change: Really nice assets.
Speaker Change: Average per unit cost in the low 200, thousands so we take the price is very very attractive.
Speaker Change: Stabilized assets in there, where you're talking about a go and yield.
Speaker Change: Mid sixes to eight and you've got a.
Speaker Change: Quite a few assets there that are really new that are not yet stabilized or kind of have kind of more of a more of a value add component.
Speaker Change: So what we're trying to do is we're trying to sell.
Speaker Change: Sell off the assets that are older and less attractive with less growth.
Speaker Change: You look at the Mlps, we've sold and the few long term care assets. We saw they tend to be older assets, and we're really focusing on newer higher quality assets.
Stefan: If you want to add Stefan.
Stefan: One of the things I would point out is as we've been building this pipeline.
Stefan: Several of these assets are actually.
Stefan: Have actually come to us on an off market a direct basis.
Stefan: So as we're executing the strategy. It's also it's not just a matter of us.
Stefan: Looking at broker deals, but but again going back to what our original strategy was with our operators, it's it's really being able to work with them.
Stefan: Have them bring us transactions that work for them or what they are seeing or potentially even bring us assets that are in their existing portfolio that.
Speaker Change: That they want to sell and Thats. It. Thank you for saying that is if I am looking at the list here. The majority of these assets were not listed by a broker or not widely marketed the majority are assets, where we had kind of the inside track with either the <unk>.
Stefan: Owner operator.
Stefan: Or in some cases a broker.
Stefan: Got it that's helpful and then.
Stefan: Kind of going back to your comments, Danny about selling non core assets you guys kind of your cost of capital continues to improve you mentioned are focused on selling some of the slower growth non core.
Stefan: Product in the portfolio, how do we think about the mix between continuing to use the ATM and using kind of noncore asset sales to fund plans around future investment activity.
Stefan: Yes.
Stefan: This Brian you touched on it I would say from a proceeds perspective of how we're going to pay for these things first and foremost the cheapest cost of capital that we have the cheapest capital. We can source is our retained earnings and if you look at our dividend payout ratio, it's obviously getting down to around the targeted I think it was.
Stefan: Below target last quarter. So we do have retained earnings that would be the first source of capital to pay for acquisitions dispositions as the next one and again youre, taking lower slower growth assets and you're deploying that money back into better quality higher growth assets. So that's a terrific use of that rate there are current cost and I say.
Stefan: Current I mean immediate cost of equity is definitely below our incremental cost of debt but.
Stefan: We don't necessarily think about that as a long term cost of equity capital and what I mean by that is.
Stefan: People over the last 57 years. The S&P has returned 10, 5% and I think that investors should expect a 10% return on their on their investment. So on a total return basis for us that includes the dividend at 3% plus we need to grow earnings I think that's a fair.
Stefan: Our evaluation of our long term cost of equity, having said that the ATM has been good to us we've been able to source capital at attractive rates at very low cost.
Stefan: Are very price sensitive I wouldn't anticipate that we're going to just flood the market if the stock isn't performing well, but if we can take advantage of a good stock price than we will.
Stefan: As I say, we are extremely price sensitive so I think with all of that in cash on hand that should we should be more than able to take care of the pipeline that we've got and Stefan is out there continuing to build for the next tranche of assets.
Speaker Change: Thanks, Brian I appreciate the details.
Speaker Change: Your next question comes from the line of Michael Carroll with RBC capital markets. Your line is open.
Michael Carroll: Hi, Mike.
Speaker Change: Hey, Jamie Thanks.
Thanks for taking my question just real quick I wanted to highlight what's going on with trilogy I know your occupancies increased a decent amount can we kind of spend some time on the rates I guess, specifically on the Medicaid side I know the rates have been pretty good over the past few years.
Speaker Change: Do most of those states reset those rates is it July and should we expect that to moderate as we kind of get into later in the year or is there something else going on there that is helping to push those rates higher.
Gabe Wilhoit: Hey, Mike It's Gabe I'll take that one yes July is the day for most of the states.
Speaker Change: What were anticipating and expecting is.
Speaker Change: Kind of a raise in line with inflation there is a path to outperformance of that and the states that <unk> operates in all to a certain extent have a value based care component.
Speaker Change: With Ohio, having that.
Speaker Change: The largest component of value based care.
Speaker Change: So what that means is that the states will give you an add on to the Medicaid rate. If you can demonstrate outperformance on certain quality measures as you know.
Speaker Change: I think trilogy still has opportunity to capture the total dollars that are available for that outperformance.
Speaker Change: It's a matter of tracking the right stats, it's a matter of reporting and it's a matter of aging into the reporting to show that you can you've demonstrated over the appropriate period and obviously each state has its nuances around that so I.
Speaker Change: Long way of saying I view inflationary increases as kind of the floor and the expectation with some opportunity for outperformance that you would see probably in the second half of the year.
Speaker Change: Okay. That's interesting and then I gave similar to that on the Medicare advantage side, how often are those rates updated as that more of a negotiation that happens throughout the year or is there specific dates.
Speaker Change: Where that occurs.
Speaker Change: Okay.
Speaker Change: I believe that's a rolling negotiation and would happen organically, especially because we're looking at new med advantage plans that are not contracting with trilogy. Currently so we substantially expanded the universe of.
Speaker Change: Residents of the states that trilogy operates.
Access to <unk> facilities by signing up with new Med advantage plans that we havent had contracts within the past.
Speaker Change: That's a pretty significant tailwind.
Speaker Change: From a census perspective at <unk>, the extent of it is really tough to measure today.
Speaker Change: I think we do outperform metrology throughout the rest of the year Medicare advantage would be a likely candidate for the reason why and it's not just.
Speaker Change: <unk>.
Speaker Change: The rate at the Medicare advantage plans, it's the access to more people and more people that can get higher quality of care and what we've seen more recently I guess in the last six months is Medicare advantage plans really leaning into quality and as trilogy has been able to demonstrate that quality over and over again like I said in my remarks there.
Speaker Change: Star ratings continue to go up.
Speaker Change: They are realizing the value and they're more willing to work with <unk> on.
Speaker Change: All right that works for both I would also say at <unk> occupancy goes up on the skilled nursing side. This all plays into the broader strategy of optimizing Q mix. So youll see the Medicaid risk into the Medicaid days at trilogy kind of decline over time.
Speaker Change: And Medicare advantage and Medicare stays increase over time as strategy kind of Optimizes for that Q mix. Just a reminder, the scanning your Medicare advantage contracts are typically written as a percentage of Medicare. So if theres a Medicare increase say on October one.
Speaker Change: Medicare advantage rates will go up as well.
Okay perfect I appreciate it.
Speaker Change: Your next.
Speaker Change: Question comes from the line of Ronald Camden with Morgan Stanley. Your line is open.
Ronald Camden: Hey, Hey, congrats on a great quarter, just two quick ones.
Ronald Camden: So first I think you talked about sort of the strong move ins in April.
Ronald Camden: Obviously, we're getting into the peak selling season here I guess Im just curious.
Ronald Camden: If you could provide some color of where our pricing is going out.
Ronald Camden: And anything you're doing sort of different.
Ronald Camden: This year.
Ronald Camden: Versus sort of previous years in terms of capturing this demand that would be helpful.
Ronald Camden: Yes. The first thing I'd say is you're right. We've certainly seen a sharp increase in move ins in April and.
Ronald Camden: I don't like to predict the future, but I feel pretty comfortable that the.
Ronald Camden: The rest of this quarter and next quarter, I think will be strong as well, but we'll have to wait and see.
Ronald Camden: From a pricing perspective, we did have rate increases.
Ronald Camden: Either January or March 1st depending on the buildings that kind of varies.
Ronald Camden: We raised the street rate and we raised the rate on in place residents. However, not everybody saw a rate increase for example, if somebody moved in November one.
We didn't turn around and raise the rate on January 1st right. They've got a certain amount of time before we raise their rates. So the impact of those rate increases will continue throughout the year.
Ronald Camden: I think the big focus this year and last year, a couple of things actually number one is as a reduction of concessions. So even if you. If you if the rates only went up.
Ronald Camden: I think I think our average rate increase of six plus percent last or this year, but if youre, if youre, if youre working with fewer concessions, meaning less free rent.
Ronald Camden: Less payments to places like place for <unk> I think that has a big impact and I think we really saw that had a significant impact on Q1 numbers were.
Ronald Camden: <unk>.
Gabe Wilhoit: Okay. So as occupancy may have dropped a little bit, but you still saw margin NOI and revpar move up substantially. So the other thing is dynamic pricing, which is something <unk> been way ahead of the curve on and one of the things that was a topic at our operator summit Im not sure. If you want to say anything else about that Gabe, yeah, and going back we've talked about this before.
Ronald Camden: <unk> the.
Speaker Change: The trilogy management team was working with revenue management specialists that had aviation background hospitality background to help them price.
Speaker Change: Every unit individually at least quarterly so that as occupancy ramps. The street rate makes sense. So that you are getting paid for the quality.
Speaker Change: Yeah, and I think it also allows you to differentiate between not all two bedroom suites are identical right. Some may have a better view.
Speaker Change: So I think the idea is not just to.
Speaker Change: Three different pricing levels, one for studio one for a one bedroom one for a two bedroom, but in some cases be able to charge more for better rooms et cetera.
Speaker Change: And I think the Revpar numbers.
Speaker Change: Like that.
Speaker Change: Great.
Speaker Change: My second one.
Speaker Change: Just really quickly is really just on tariffs.
Nearly the potential for less supply or even lower supply is really sad for the sector, but just wondering.
Speaker Change: Post sort of tariff announcements how are you guys thinking about sort of the ripple effect on the business, whether it's trilogy development, whether it's food whether it's whatever just.
Speaker Change: What are you guys focused on.
Speaker Change: Well I think number one is I think we're better positioned than almost any other industry and I think if you look at the sector as a whole.
Speaker Change: When the market was getting hit with all the tariff news I think that the.
Speaker Change: The health care services and rates held up much better if you kind of look at our repair expense line items.
Speaker Change: Wages I think are.
Speaker Change: Indirectly over the long term, maybe theres an effect if more.
Speaker Change: If there's if there's more going on in the states with fewer workers, but I don't think I expect any kind of immediate impact from that if anything.
Speaker Change: If there's a downturn in economic activity may actually help us from employment perspective, I don't think its going to have a tremendous impact on food construction costs.
Speaker Change: For trilogy in particular, what we do development could have an impact on that.
Speaker Change: I don't know I think construction costs are coming down anytime soon.
Speaker Change: But I think the any I don't see a tremendous impact.
Speaker Change: From from tariffs and frankly, if it does.
Speaker Change: Pushup inflation a little bit.
Speaker Change: We were just recover that through higher rates I mean, there may be a little bit of a delay but.
Speaker Change: We're very well positioned for for higher expenses and higher inflation and the one thing I would add to that Ron This game is the.
Speaker Change: The industry as you well know and have written about is facing a huge.
Speaker Change: Issue relative to supply and really need to start developing to meet the demand that's building.
Speaker Change: Hi, tariffs and anything else, that's inflationary only puts more pressure on the ability for private companies to develop senior housing assets.
Speaker Change: By keeping financing causes financing cost of that development higher than what makes sense for it to happen.
Speaker Change: We closely watch the construction starts until I think until rates come down or you have multiple years of compounding NOI growth, it's still going to be very difficult for a new supplier to pencil out and for new supply to come online. It's great for us in our existing portfolio I think demand will continue to ramp Occupancies will continue to grow.
Speaker Change: At some point I mean, the industry really does need to start building again to meet the demand. So that the people that are going to need that care have access to it.
Speaker Change: Great. That's it for me thanks, so much.
Speaker Change: Your next question comes from the line of Joe <unk> with Jefferies. Your line is open.
Joe: Joe Welcome to Cowen. Thank you.
Speaker Change: Congrats on the strong quarter and thanks for taking my questions. So trilogy outperformance was largely driven by the skilled side and <unk>.
You noted that you were now seeing a sharp uptick in move ins for the al side I'm, just trying to get a sense of which channels are driving these move ins are these residents that are entirely new to the challenging model or are these residents that are being converted from skill to assisted living any color there would be helpful.
Speaker Change: Yes.
Speaker Change: I was referring to the shop segment, where we've seen a tremendous uptick in move ins not that we haven't seen it at trilogy, but I don't think its been as sharp and obvious as the rest of the shop portfolio.
Speaker Change: It's been kind of slow and steady at trilogy.
Speaker Change: You didn't see the drop off in Q1 as heavily as the rest of the shop portfolio.
Speaker Change: Traditionally in the past trilogy has emphasized a lot of it is moving from the skilled side of the business over the last five six years since we bought trilogy nine years ago, we've been working with them closely to improve on their marketing. So I'll give you. An example trilogy opens up several new facilities a year tradition.
Speaker Change: <unk> they would fill up the skilled side first and then use the skilled residents to fill up the al in the last couple that we've seen the ones. We visited it was actually the opposite the al and IL was filling up faster than the skill. So theyre focusing much more heavily on marketing and not just relying on skilled residents to fill up their beds. Yes. So Joe This is Brian.
Speaker Change: Give you a quick couple of quick data points here. So if you think about a rent a skilled nursing resident of trilogy. When they are ready to leave skilled nursing, 70% of those and this is a pretty good long term trend for them, 70% of those people are going to go home, which is terrific.
Speaker Change: Right happy for that.
Speaker Change: 10% of those people are going to move into a trilogy skilled senior housing bet.
Speaker Change: And that 10% of those people represents 40% of the tenants the new residents moving into a senior housing bed at trilogy. So.
Speaker Change: That's going to be that's a really long term trend for those guys and what it is it's essentially.
Speaker Change: Self generated leads.
Speaker Change: And I don't I mean, I'm talking long term averages. So I don't see that doing anything except potentially increasing where penetration rates get even higher for trilogy again thrilled that those senior housing residents are able to go home, but to the extent that they can't then there are a huge source of additional residents in our senior housing.
Speaker Change: Got it that's helpful color and then just for my second one.
Speaker Change: And that the operator summit. This week I know in the past team is viewed <unk> as a resource for some of your smaller shop operators are there any anecdotes you can share from the summit related to how trilogy is helping improve shop operational efficiency.
Gabe Wilhoit: Yeah, I'll take that Joe it's Gabe so a couple of things I want to point out and thanks for asking about it. One is if you look at our proxy youll see that we've got a proposal for managing a manager incentive plan of stock plan, that's really intended.
Gabe Wilhoit: For us to convert what Triologies long term incentive plan is today based on cash into HR stock.
Gabe Wilhoit: And the goal there is not only building on what we believe is already best in class alignment, but also to allow <unk> to participate in the value creation from supporting some of our regional shop operators.
Speaker Change: Our strategy is a little different than some of our competitors.
Speaker Change: We focus on smaller regional densities with a regional operator that generally has a headquarters within driving distance from the communities that they manage for US. What you gave with that is better control over the culture better control over the care and that pulls through to NOI and we've seen it over and over again, what you <unk>.
Speaker Change: Lose with regional operators is.
Speaker Change: The size and scale to build out sophisticated platforms to help.
Speaker Change: Them grow their businesses, what we have with trilogy now where we have this incentive plan that's based on <unk>.
Speaker Change: <unk> stock is.
Speaker Change: The ability to partner with them to use their platform to help support the regional operators and that can mean, a lot of different things and a lot of them did come up at our operator summit last week.
Speaker Change: So that can mean, taking triologies GPL and it's a very low friction decision to say hey, if you can.
Speaker Change: By supplies for cheaper through trilogies GPO do you want to sign up for it usually thats. It yes that can meet trilogy, helping with their revenue management platform that they've already got internally to help our other operators set the right prices dynamically for each unit within our portfolio that can mean talent acquisition retention and training and <unk>.
Speaker Change: Trilogy trains better than anybody probably on planet Earth <unk>.
Speaker Change: Caregivers in this industry it.
Speaker Change: It can mean marketing web presence mobile presence, Google search optimization, all of those things and more are available to the regional operators now through trilogies platform in a way that I don't think anybody else can compete with where.
Speaker Change: Where we have alignment and a great partner in trilogy, that's a world class operator, we're at different levels.
Speaker Change: Incorporating those options and frankly different operators I think we will utilize the resources differently over time.
Speaker Change: And.
Speaker Change: Also frankly, we don't want to give out all the secrets of how we're able to do what we're doing what I can tell you is the feedback from the operators summit was incredibly positive we feel really good about the bench that we currently have the new operators that were in talks with for acquisitions were also able to attend.
Speaker Change: And they fit in perfectly with the group that we already have which is regional operators with a strong repartee reputation for resident care and.
Speaker Change: And we think that collectively the ads platform value, that's going to come through in NOI and growth for the company over.
Speaker Change: The long period not over the next two and three years, only but over decades and by the way Joe Thats a lot that Gabe touched on but we don't even talk about patient care right. I mean, if you look at what excites me. The most about all this technology is I mean, it's great for everything Gabe mentioned I agree, but I think from a.
Speaker Change: Patient care quality of outcomes perspective.
Speaker Change: I think I'm, even excited more about that because the if you. If you look at some of the stuff that they're working on now as far as being able to support the resident care, it's very exciting and I think that in the long term I think it's going to be as beneficial if not more than everything else.
Speaker Change: Great. Thanks for the time guys I appreciate it.
Michael <unk>: Your next question comes from the line of Michael <unk> with Green Street. Your line is open hey.
Michael Carroll: Hey, Mike.
Michael Carroll: Hey, good morning, Thanks for the time.
Michael Carroll: Maybe going back to the outpatient.
Michael Carroll: Segment. So on those 12 assets that were pulled out of the same store what sort of cap rates you expect on those dispositions and when do you actually expect to close on those sales.
Michael Carroll: Well I'd say.
Michael Carroll: I'd say, it's a pretty mixed bag I mean, some of these are assets that.
Michael Carroll: Have.
Michael Carroll: There are small that are not.
Michael Carroll: Not in markets that we want to continue to be in.
Michael Carroll: Some have struggled with leasing.
Michael Carroll: So I think it's.
Michael Carroll: It's hard to pinpoint exactly what.
Michael Carroll: Kind of an average cap rate would be but I think overall, what I think overall what it really brings is it really does cleaned up the portfolio for us in terms of really refining where.
Michael Carroll: Where we want our mob portfolio does it and I think we sold two already and have a.
Michael Carroll: Our expectation is the majority if not all of these will sell.
Speaker Change: Yes, this is not financial engineering Mike.
Speaker Change: We are committed to marketing needs of the 14 assets that are outside of the same store pool two of them have sold two of them are under contract. We are in various stages of negotiation and exposure with the remainder of them I would be surprised I mean, we're not a seller at any price, but I'd be surprised if any of these come back into the same store pool.
Speaker Change: We were unsuccessful in selling them.
Speaker Change: And as to funds right I mean, we actually had a wonderful run of being able to sell noncore assets for a long time, even when the financing markets were entirely shut down they were smaller buildings. They were more bite sized people non leveraged buyers were able to take them down.
Speaker Change: There's attributes of that and the remaining 2014 so.
Speaker Change: I feel good about our ability to execute on this and it's a bit of addition through subtraction right. What's left over in our outpatient medical portfolio is much higher quality much larger much higher percentage on campus and higher growth prospects.
Speaker Change: Got it that's helpful.
Speaker Change: Maybe going back to the REIT discussion on trilogy.
Speaker Change: Average daily rate growth.
Speaker Change: Little bit of a deceleration in <unk> on the senior housing side of the business can you just explain what drove that and where do you expect that to trend for the remainder of the year.
Speaker Change: Yeah happy to do it I think mainly that that number is a little noisy in the supplemental because it doesn't account for the bad mix shifts so as we've talked about before.
Speaker Change: The beds that were adding that trilogy, a good amount of them are independent living villas independent living beds.
Speaker Change: Rather than the <unk>.
Speaker Change: Mr living beds, those come at a much lower rate, but a much higher margin than assisted living so net net.
Speaker Change: I think it's still pretty compelling growth, but the number looks a little bit lower because the universe of beds has shifted a bit.
Speaker Change: Trilogy was able to pass through about a 6% increase on the private side throughout its senior housing and I think the bad mix shift along with kind of the timing of that rate increases for people who moved in later in the year is is accounting for that number looking different than to 6% number.
Speaker Change: Yes.
Speaker Change: Understood. Thanks for the time.
Speaker Change: Thanks for the questions.
Speaker Change: Again, if you would like to ask a question press Star one on your telephone Keypad. Your next question comes from the line of Seth <unk> with Citi. Your line is open.
Speaker Change: Yes.
Seth: Hey, How's it going thanks for taking my questions I guess, my first one and you kind of touch on that a little bit already.
Seth: But I think what the acquisition pipeline, you mentioned, bringing to new operators.
Seth: Is that you haven't partnered with before can you just kind of talk about the process too on how you.
Seth: Right.
Seth: Operators and kind of where do you see that opportunity set.
Seth: Kind of as you think about future investments.
Seth: Yes sure.
Seth: So.
Seth: We are constantly.
Seth: Reviewing and analyzing and underwriting potential operators I mean that has just been something that we've consistently done.
Seth: It's not just in.
Seth: In anticipation of acquisitions, we always want to be prepared if there is any need for us to to replace our operator.
Seth: In this case. These two operators are are groups that we've actually had.
Seth: Prior experience with folks from our team that have either work with them in the past or.
Seth: <unk> known them very well.
Seth: And so these were actually groups that we had identified as ones that we wanted to grow with at some point in time.
Seth: And I think really what happened here is that we started to see some opportunities in the markets in which they operate in.
Seth: And that was kind of the key for us to say Okay. I think this is this is the right time for us to move forward with these groups.
Seth: But effectively we're also looking at where where do these folks operate how do they complement the existing operator pool that we have.
Seth: And are they going to be in markets, where we want to grow.
Seth: And can help us to expand.
Our growth into into those markets. So these were these were actually fantastic opportunities for US we were very happy to be able to to.
Seth: Identify some assets that we could work with.
Seth: With them and we.
Seth: We think what it also does for US is it will allow us to have.
Seth: Future growth it will give us more opportunities to to see additional assets in those markets help us with our growth, but also diversify our our operator pool as well.
Seth: So that we.
Seth: We can always have coverage in the areas that we want to be in.
Seth: So just to make sure you understand.
Seth: Both of these instances we identified at the operator, we identified the operator before we identified the buildings. So these are operators we've been looking for opportunities with I think Stephane correct me, if I'm wrong in one or two of the instances they actually helped us identify the building I believe yes.
Seth: One of them I know for sure yet.
Seth: No.
And I know we've worked on other opportunities with these operators that we werent able to lock up so we've been working with these folks for a while.
Seth: It just came down to finding the right buildings to bring them into and it is not a situation where we're chasing the shiny penny.
Seth: <unk> been tracking these guys for years in some cases decades, if youre thinking about some of our employees, where they where they worked at previously.
Seth: But it's really now a function of it's the right deal at the right time, and we have a cost of capital that we're able to take advantage of.
Speaker Change: Great. Thank you that's helpful and I guess for my follow up.
Speaker Change: I noticed in your supplemental you disclose kind of a new campus development.
Speaker Change: I think in the past you tend to focus on <unk> as an expansion team can you just talk about that new campus project and whether or not you see kind of are there opportunities to do that type of power plant.
Speaker Change: Yes, so we typically start two to three new campuses this year with trilogy.
Speaker Change: Trilogy development includes new campuses. It includes the IL villas and includes expansion. So it's a kind of three different buckets, and we will continuously unless things change be working on all three of those segments. The one that you mentioned the one that's on our list is an opportunity that came to us in Michigan. It is actually a new.
Speaker Change: New <unk> building that I don't believe ever actually opened and.
Speaker Change: The local authority reached out to trilogy, it's part of a new development of New planned development and said Hey, when you come in and take over this building. So lets you took a look and what they're doing is they're basically redevelopment building they'll keep most of it obviously and they'll add skilled nursing to it to turn it into integrated senior health campus.
Speaker Change: So that's how that one around just a little bit different most <unk> are completely 100% ground up but more than one time, they found existing buildings and incorporated them into there.
Speaker Change: Footprint into their model, but you will see us start additional campuses. This year that we just haven't started them yet we usually start them it kind of in the spring or summer months.
Speaker Change: That will be added to the list sometime in the next quarter or two.
Speaker Change: Great. Thank you.
Speaker Change: I will turn the call back over to Jenny <unk> for closing remarks.
Speaker Change: Well. Thank you very much I appreciate everybody taking time on a Friday afternoon to listen.
Speaker Change: Listen to our earnings call as you all know myself, Brian gave Stefan were available if anybody has any follow up questions.
Speaker Change: Thanks, again, and I'd like to wish everybody a wonderful weekend.
Speaker Change: Very happy mother's day, Thank you operator.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.