American Healthcare REIT, Inc. Q2 FY2024 earnings call

• Strong demand for healthcare real estate continues, with 15.7% total same-store NOI growth in Q2 2024 and 14.4% year-to-date.
• Revised guidance for total portfolio same-store NOI growth in 2024 to 12%-14%, and normalized funds from operations (NFFO) to $1.23 to $1.27 per fully diluted share.
• Strategic pillars include ensuring quality care, strong operating performance via hands-on asset management, and prudent capital allocation.
• Integrated senior health campuses operated by Trilogy Health Services had 24.1% year-over-year same-store NOI growth in Q2 2024, with occupancy continuing to climb. Trilogy's model, purpose-built facilities, and strong reputation drive demand.
• SHOP segment had 49.1% year-over-year same-store NOI growth in Q2 2024, driven by occupancy gains and RevPOR growth, with same-store NOI margins expanding by 200 basis points from the prior quarter.
• Capital allocation activities included exercising purchase options on 3 campuses within the integrated senior health campus segment totaling ~$46 million, and maintaining disposition proceeds guidance to sell ~$50 million of additional noncore properties for the remainder of the year, bringing full-year 2024 sales proceeds to ~$65 million.

The company has four property segments. The integrated senior health campuses segment had 24.1% year-over-year same-store NOI growth in Q2 2024, with occupancy at 87.4% as of July 26, 2024, and full-year 2024 guidance of 18%-20% same-store NOI growth. The SHOP segment saw 49.1% year-over-year same-store NOI growth in Q2 2024, driven by occupancy gains and RevPOR growth, with full-year 2024 guidance of 45%-50% NOI growth. The outpatient medical segment is expected to have flat to slightly declining growth in 2024. The triple net leased segment is projected to have 1%-3% growth in 2024. The integrated senior health campuses segment accounts for a significant portion of pro rata cash NOI, with managed segments making up approximately 60% of pro rata cash NOI.

• Full year 2024 NFFO guidance revised to $1.23 to $1.27 per fully diluted share, a $0.04 increase to the midpoint.
• Integrated senior health campuses segment expected to have 18%-20% same-store NOI growth in 2024.
• SHOP segment projected to have 45%-50% NOI growth in 2024.
• Outpatient medical segment expected to have flat to slightly declining growth in 2024.
• Triple net leased properties expected to have 1%-3% growth in 2024.
• Total portfolio same-store NOI growth for 2024 adjusted to 12%-14%.

• Delays in asset sales due to buyers being more cautious with diligence, including deeper CapEx scrutiny, and lenders being more stringent in underwriting.
• Interest expense remains a headwind to earnings due to higher interest costs from factors like delayed asset sales, lease buyouts, variable rate debt costs, noncash interest expenses, and GAAP above and below market rate debt adjustments.

Q: How should we think about rate growth going forward for Trilogy?

A: Trilogy's senior housing side has about 6.5%-7% year-over-year rate growth, with pricing power due to higher occupancy. Skilled nursing has a mix, with private pay acting similarly to senior housing, Medicare expected to have positive growth with Trilogy's markets seeing better than national average, and Medicaid shifting to value-based care models rewarding high-quality care.

Q: What's driving the delay in asset sales?

A: Buyers are being more careful with diligence, wanting to understand CapEx levels, and lenders are being more stringent in underwriting. It's not due to a backup in pricing.

Q: What does margin expansion potential mean for the integrated health campuses over time?

A: Trilogy's margins are below pre-COVID but improving, expected to surpass pre-COVID margins, with occupancy expected to continue climbing and various levers like Q-mix and expense management contributing.

Q: Any update on SHOP opportunities and funding?

A: There are SHOP opportunities, and they would be taken over for the cost of debt with no new dollars going out, viewed as an opportunistic play with upside.

Q: Can you talk about occupancy levels and buyout for Trilogy?

A: Trilogy's occupancy is climbing, with AL/IL having room to grow into the 90s. The buyout price is fixed, with a January 1 deadline, and the value creation of Trilogy ensures earnings accretion regardless of when closed.

Q: How to think about flow through of the $0.04 guidance raise and interest cost offset?

A: The guidance range is comfortable, and interest cost offset and segment raises are not broken down to specific pennies, but the range is based on current comfort levels with potential refinement as the year progresses.

Q: Talk about the investment pipeline and focus on Trilogy expansion.

A: The primary focus is on expanding Trilogy, with limited capital dollars directed towards that, and there are opportunities with regional operating partners but primary focus is on Trilogy expansion.

Q: Thoughts on Trilogy leadership changes?

A: The leadership changes are not a significant shift, with David's title upgrade being due to taking on more responsibilities as CFO, and Leigh Ann continuing as CEO.

Q: Seasonality in Trilogy and sustained growth?

A: There is seasonality in skilled nursing, but less than pre-COVID, and growth is driven by factors like no new supply, demand drivers, and Trilogy's ability to transition wings based on demand. Occupancy isn't the only driver of NOI growth.

Q: Dividend payout ratio and CapEx impact?

A: The payout ratio is likely to come inside the original 100% expectation, with CapEx spend tied to seasonality and operator transitions, and CapEx is right where expected.

Q: CapEx in SHOP portfolio and above-trend spend?

A: CapEx spend in SHOP is tied to seasonality (cold weather states making certain work difficult) and operator transitions, with trailing 4-quarter CapEx figures aligning with guidance, and no significant deferred maintenance.