American Healthcare REIT, Inc. Q3 FY2024 earnings call

• Completed acquisition of the remaining 24% minority interest in Trilogy for $258 million plus assumption of pro rata liabilities, enabling better capital allocation and pursuit of development. - Used proceeds from September follow-on public common stock offering ($471.2 million gross proceeds) to pay down ~$194 million on lines of credit, improving balance sheet. - Year-to-date closed over $650 million of investments including Trilogy minority interest acquisition, lease buyouts, and SHOP acquisitions. - In Q3, acquired a portfolio of senior housing assets in Washington for ~$36.2 million, transitioning operations to trusted operators, and underwrote to a stabilized high single-digit, low double-digit yield. - Disposed of an Outpatient Medical building subsequent to quarter end for ~$19.4 million. - Operational efficiencies at Trilogy, and exploring opportunities to refine operating capabilities across portfolio, leveraging Trilogy's scale and expertise to support SHOP operators.

In the third quarter, total portfolio same-store NOI grew by 17% year-over-year. The managed portfolio segments now account for approximately 67% of cash NOI. The integrated senior health campuses (Trilogy) segment achieved 22.6% year-over-year same-store NOI growth in Q3 2024, with occupancy up ~50 basis points year-over-year, strong rate growth, expense controls, and favorable mix contributing. The SHOP segment had 61.8% year-over-year same-store NOI growth in Q3 2024, driven by continued occupancy gains, accelerating RevPOR growth, and moderating expense growth. The Triple-Net Leased properties segment has 2%-4% same-store NOI growth, up from 1%-3%. The Outpatient Medical segment same-store NOI growth guidance remains unchanged as anticipated move-out activity in Q4 is expected.

• Increased total portfolio 2024 same-store NOI growth guidance to 15%-17%, up 300 basis points at midpoint. - Raised 2024 NFFO per fully diluted share guidance to $1.40-$1.43, up from $1.23-$1.27. - Updated full year same-store NOI growth expectations: Integrated senior health campuses 21%-23% (up from 18%-20%), SHOP segment 51.5%-53.5% (up from 45%-50%), Triple-Net Leased properties segment 2%-4% (up from 1%-3%), Outpatient Medical segment same-store NOI growth guidance unchanged. - Revised guidance includes ~$0.06 per share benefit from other income, attributable to improved property performance, buyout of remainder of Trilogy, and lower interest expense due to debt paydowns.

• Labor market pressure as a key concern, with employment being a major pressure point. - Potential impact of inflation on expenses, though expected revenue growth may offset it. - Concerns about immigration policies potentially negatively impacting ability to find employees, as labor demand is increasing.

Q: Could you provide a little more color on the Trilogy platform? And what is it that is unique that can maybe be leveraged across the rest of your operators on the SHOP side?

A: Gabe Willhite said Trilogy has proven to be a top management team. Now as 100% owner, they're looking to leverage Trilogy's platform in areas like revenue management, marketing, sales, recruitment, and retention of employees to support other regional operators.

Q: Brian, you mentioned an insurance benefit. What exactly is that insurance benefit coming from?

A: Brian Peay said it's typically insurance proceeds from property losses, plus a hodgepodge of other non-real estate amounts, with ~$0.04 per share so far in Q3 and visibility to another ~$0.02.

Q: As occupancy continuing to climb gradually at Trilogy, you've spoken about this ability to be more selective on residents that they accept. Can you give us a sense how impactful that can be to the bottom line? And just how you think about that mix going forward for kind of overall portfolio occupancy, senior housing versus skilled?

A: Danny Prosky said the goal isn't to maximize occupancy but NOI. Higher senior housing occupancy (AL/IL) vs skilled, with AL/IL having higher margin and longer length of stay, impacting NOI positively. Goal is to focus on mix to maximize NOI.

Q: Can you guys provide some more color on how you're viewing, I guess, operating expenses, specifically within the Trilogy and the seniors housing operating portfolio? It looks like you had some pretty good expense controls this quarter, at least versus our estimate. I mean, if inflation starts to tick up next year, I mean, will expense growth also tick up? Or is it occupancy at that level now where you should be able to offset it just because you have a bigger occupancy pool to kind of overlay some of those fixed costs towards?

A: Gabe Willhite said RevPOR growth has exceeded ExPOR growth and is expected to continue. If inflation kicks in, expenses may grow faster, but revenue growth is expected to more than make it up.

Q: Just two quick ones from me. So, starting with both Trilogy and the SHOP portfolio, looking at occupancy at about 87% for Trilogy, almost 88% for SHOP, maybe can you give us some updated thoughts on where you think that occupancy can trend? And specifically, can you talk about sort of operating leverage at these levels of occupancy for the incremental tenants?

A: Gabe Willhite said occupancy will continue to trend up, expecting it to be in the 90s. Incremental margin varies by line of business, generally 40%-80%, with IL having higher increment. Brian Peay added occupancy growth isn't the only lever, with other factors like optimizing rates and stopping discounts also driving NOI.

Q: On the fourth quarter implied FFO, I think it's about $0.395 ex the insurance proceeds you mentioned, Brian. Is this a good run rate that we should use when thinking about 2025? I realize there are seasonality factors to consider, and I'm not asking you to give guidance, but just kind of contextualizing how that fourth quarter could flow into the year ahead would be helpful?

A: Brian Peay said there's seasonality, and 0.395 isn't just chucked in as Q1's number, but occupancy growth isn't the only factor driving NOI.

Q: It seemed it was more kind of driven on the debt side and taking over some of these properties at a more favorable basis. As you look out to the transaction market, is this where you're seeing the bulk of the opportunity maybe on the debt side? And then if you could broadly comment on the availability of lending or debt capital within the senior space, that would be helpful?

A: Stefan Oh said acquisitions like Washington, Oregon portfolio were due to inside track from mezz debt participation, and Atlanta deal from relationship with special servicer. Focusing on off-market deals and relationships, and Brian Peay added regional operators sourcing assets in line with portfolio, and Danny Prosky said hierarchy of funding is internally generated retained earnings first, then dispositions, then equity, and they're not relying on project-specific secured financing currently.