AHR - NYSE

Good day. My name is Dennis and I will be your conference operator. At this time, I would like to welcome everyone to the American Healthcare REIT Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Alan Peterson, Vice President, Investor Relations and Finance. Please go ahead.

Good morning. Thank you for joining us for our fourth quarter 2023 earnings conference call. With me today are Danny Prosky, President and CEO; Brian Peay, Chief Financial Officer; Gabe Willhite, Chief Operating Officer; and Stefan Oh, Chief Investment Officer. On today's call, Danny, Gabe and Brian will provide prepared remarks discussing our Company financial results for 2023 as well as our outlook for the current year and recent news relating to American Healthcare. Following these remarks, we will conduct a question-and-answer session with covering research analysts. Please be advised that this call will include forward-looking statements. All statements other than statements of historical facts made during this conference call 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. These risks and other factors that could adversely affect our business and future results are described in our press releases and in our filings with the SEC. All forward-looking statements speak only as of today, March 22, 2024. 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. 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 and supplemental information package. As a note, our operating and financial results, including GAAP and non-GAAP financial measures are fully detailed in our earnings release and supplemental information package. You can find these documents as well as SEC reports and the audio webcast replay of this conference call on our website at americanhealthcarereit.com. With that, I will turn the call over to our President and CEO, Danny Prosky.

Thank you, Alan. Good morning or good afternoon, everyone, and thank you for joining American Healthcare REIT's first earnings call as a New York Stock Exchange listed company. We are proud to be part of the listed REIT community and are as optimistic as ever about the prospects for our business. Before we begin, I'd like to take a moment to thank all of our AHR Board members, employees and supporters for the countless hours they have dedicated over the last 18 months since we began preparing for the common equity offering we completed in February of this year and our related listing on the New York Stock Exchange. For myself and our executive team, we say thank you. Now let's get started. As Alan mentioned, I'm Danny Prosky, President and CEO of American Healthcare REIT, or AHR for short. Today, I will start with a brief high-level overview of who we are to give listeners a better understanding of AHR and provide some brief comments on where we intend to go from here. Then I will turn the call over to Gabe and Brian to discuss operating performance across our diversified healthcare portfolio and our financial positioning after the recent completion of our equity offering and listing on the NYSE. We've had the pleasure of introducing many new investors to AHR over the better part of the last 1.5 years. For those of you who are still getting to know us, we are a diversified healthcare REIT with approximately 57% of our net operating income as of the end of the fourth quarter of 2023 coming from our RIDEA operating portfolio, where we participate in the operations of the facilities that we own. At the end of the year, the majority of our RIDEA NOI, making up approximately 49% of our total NOI, came from our integrated senior health campuses, which we refer to as our Trilogy assets, with Trilogy Management Services operating the facilities. Our Trilogy assets comprise the largest part of our business and our unique among listed healthcare REITs. To put it simply, our Trilogy assets are full service, catering to the most of the intermediate and long-term healthcare needs of seniors. These primarily purpose-built campuses contain assisted living and skilled nursing beds all under the same roof. Many of the facilities also have independent living and memory care units on site. Having all these services within one campus provides meaningful efficiencies that will allow Trilogy to be among the best-in-class operators within healthcare real estate. Our Integrated Senior Health Campus segment is owned in a joint venture structure of which we own approximately 75%. In 2023, we entered into an agreement that provides us with the option to purchase the portion of our Trilogy joint venture that we do not own at a specified price through September 30, 2025. We believe that this is a tremendous growth opportunity with limited operating risk as we know the assets well and they are already fully consolidated in our financial statements. Additionally, if we exercise the option, we would have full control over implementing Trilogy's external growth strategy and would result in earnings accretion since we would receive 100% of any future earnings generated by the Trilogy assets. Moving on to our Senior Housing Operating Property segment, otherwise known as SHOP. We believe that this segment offers significant upside potential due to our ability to capture further occupancy and rental rate growth. We believe that the fundamentals underpinning this segment, namely an aging population and muted supply growth, will allow for stronger growth relative to our other segments over the near-term. Over the last few years, we have endeavored to engage leading operators to manage our SHOP assets who we believe are well suited to pursue our strategy of increasing occupancy, margins and NOI. We are bullish on the prospects for long-term care over the next several years due to strong growth in demand, coupled with less new supply as a result of a meaningful pullback in construction starts in recent years. Compared to our peers, we have a greater exposure to higher acuity assisted living units, which we believe provides a superior risk-adjusted return from the needs-based care that these properties provide. SHOP makes up the balance of our RIDEA properties and roughly 9% of NOI for the fourth quarter of 2023 spread across 55 properties in 14 states with seven operating partners as of the end of 2023. We expect this exposure to grow over time given the strong bottom line trends we anticipate in this segment over the coming years. The balance of our NOI is split between outpatient medical buildings and triple-net leased assets, which make up approximately 27% and 13%, respectively, as of the fourth quarter. Our outpatient medical buildings span the country and are well located with roughly 75% of them classified as on-campus, campus adjacent or affiliated with a broader health system. 90% of the segment is multi-tenant, which we believe mitigates our exposure to tenant concentration risk. In our triple-net leased segment, we own a net lease senior housing facilities, skilled nursing facilities and two hospitals. This segment generally offers lower growth potential than our other segments with operating exposure since we primarily act as a net lease landlord in this segment and are entitled to receive contractual rent that generally benefits from annual escalators. That said, we believe that this segment provides us with a stable and growing source of revenue. With that, we look forward to our future as a listed company. We believe we are well positioned to deliver outsized growth, driven by our focus on senior housing investments in the RIDEA structure and our unique access to Integrated Senior Health Campuses through Trilogy. We have seen strong senior housing fundamentals drive portfolio performance in 2023. And because those fundamentals remain strong, we continue to partner with great operators. We expect to continue to deliver operating results that create value for our shareholders in the future. Now I will turn it over to Gabe to discuss recent operating trends within our portfolio.

Thank you, Danny. That was a great overview. I'm excited to report the fourth quarter of 2023 was another strong quarter and capped off a very strong year. We executed on aggressive organic growth initiatives and our portfolio continued to deliver outsized growth driven by highly attractive fundamentals in the senior housing and care space. Across our portfolio, same-store NOI for the fourth quarter grew by an impressive 9.5% year-over-year. Our operating portfolio, which consists of our Trilogy investment and SHOP segment led the way. Our Trilogy investment, in particular, continued to perform well. Trilogy finished 2023 with occupancy roughly 300 basis points higher than in 2022. This is particularly encouraging because Trilogy's occupancies are already generally very high in the industry, roughly 300 basis points higher than the NIC average for both assisted living and skilled nursing. And we were happy to see Trilogy continue to trend well above the industry average. It's a testament to the quality of the operator and the care they provide for residents. That occupancy growth at Trilogy, coupled with strong rate growth, both in private pay and in government reimbursement rates, drove healthy revenue growth that substantially outpaced expense growth. And as a result, Trilogy achieved 14% same-store NOI growth for the year and a nice margin expansion in the fourth quarter to 16.7%. To put that margin in context, our Trilogy facilities are generally comprised of 45% senior housing beds, with the balance predominantly being skilled nursing beds. If a good skilled nursing margin is approximately 10% to 12% today and a good assisted living margin is generally in the mid to high 20s, our Trilogy facilities, given their business mix, generally compare favorably with mid- to high-teen NOI margins that are growing. Our senior housing operating portfolio also continues to benefit from strong senior housing fundamentals. We saw compelling NOI growth of 44.9% for the fourth quarter of 2023 and 27.2% for the full-year. Occupancy grew at a torrid pace. Q4 2023 occupancy was 415 basis points above Q4 2022. We believe that much of that occupancy growth can be attributed to our active asset management strategies. Across our portfolio to Danny's earlier comments, we believe that we are still in the early innings of capturing the full value of the current supply-demand dynamic that has been a tailwind for our RIDEA portfolio, and then our SHOP portfolio still has room to grow even after delivering strong results in 2023. In order to deliver on that value, we've been proactive in making sure that we get the right operator and the right building. In 2023, we executed several operator transitions across the portfolio and we recently completed our last planned operator transition within our SHOP segment, establishing our first relationship with Heritage Communities, who took over management of two of our assets in Nebraska earlier this month. We've already started to see the benefit of those transitions, and we believe that we are well positioned to unlock more value in 2024. We anticipate the full benefit of operator transitions to be realized over time as we generally expect occupancy to build first, drive revenue and then pull through to NOI after incurring some typical operator transition costs. Based on what we've seen, we have conviction the right operator can drive outsized returns. We saw this in play in our Texas senior housing portfolio, where we transitioned management to one of our top-performing operators at the time of acquisition in late 2022. We saw near immediate improvement in performance with occupancy increasing by roughly 900 basis points in under a year. We hope to replicate that strategy with an acquisition that we completed in February, where we acquired a 12 campus portfolio of senior housing assets in Oregon by essentially equitizing our mezzanine debt. We were able to acquire that asset at an attractive basis, roughly $94 million and $110,000 per bed and immediately transition the portfolio to one of our existing operator relationships. In short, we think our roster of proven operators will deliver on growth in 2024. Our team also approached 2023 with a keen focus on expense management with a particular focus on the agency labor usage, and I'm happy to report that we've seen meaningful improvements on our expense controls, which contributed to our strong bottom line performance. Since the peak of agency labor usage in 2022, our SHOP assets have seen close to a 70% reduction in agency labor costs, and we expect those costs to continue to trend down over time as we focus on that issue next year. As we look at early results for our operating portfolio in 2024, occupancy continues to trend upward to start the first quarter. Total portfolio spot occupancies for our SHOP and Integrated Senior Health Campuses are currently up 250 basis points and 100 basis points, respectively, from the average reported occupancy during just the fourth quarter of 2023, with SHOP at roughly 83% and Trilogy at roughly 86%. Our outpatient medical portfolio produced same-store NOI growth of 3.2% for the full-year 2023. We are pleased with that level of growth in a business that has been dependent on strong leasing. That being said, sustaining that level of growth in 2024 would be a bit of a surprise. We are seeing broader industry trends of health systems consolidating space and downsizing. Of course, our team will again take a proactive approach to leasing in 2024, but we expect known vacates early in the year that require re-leasing as well as a tougher comp from a good 2023 to challenge our ability to deliver on growth in that segment in 2024. The remainder of our triple-net portfolio delivered a steady 2% NOI growth for the full-year 2023, and we are seeing the strong fundamentals in senior housing having a positive impact on our tenants' businesses as well. I'll now pass it over to Brian to discuss the recent completion of our public equity offering and our listing on the New York Stock Exchange, our financial position and our 2024 outlook with more detail before turning the call over to Q&A.

Thanks, Gabe. As many of you know, recently, in early February, American Healthcare REIT completed an offering of 64.4 million shares of common stock and subsequently listed those shares on the New York Stock Exchange, resulting in the first REIT IPO in over two years. The purpose of the IPO was not only to provide liquidity to our existing shareholder base, but also to use proceeds from the offering to improve our balance sheet. We raised nearly $773 million and utilized the net proceeds to pay down $721 million of shorter-term and floating rate indebtedness. At a weighted average interest rate of approximately 7.5%, which will result in significant interest expense savings going forward and a large reduction in floating rate debt outstanding. After the recent debt pay downs and utilizing our Q4 2023 annualized adjusted EBITDA, we project that our net debt to annualized adjusted EBITDA should be in the low 6x range on a pro forma basis. We will be highly selective regarding external growth opportunities that we choose to take advantage of in order to maintain a conservative leverage profile. Additionally, over time, the earnings growth embedded in our portfolio such as the 8.6% same-store NOI growth from 2022 to 2023 will serve to continue to delever our balance sheet. As we look forward to 2024, we are issuing full-year guidance for normalized funds from operations of $1.18 to $1.24 per fully diluted shares outstanding. Embedded assumptions included within that earnings guidance range would be for total portfolio same-store NOI growth of between 5% and 7%, the potential for approximately $68 million of continued asset sales with the proceeds used to pay down debt, further improving our leverage statistics. The build to the 5% to 7% same-store portfolio growth involves the integrated senior health campus segment growing in the 8% to 10% range since growth may slow slightly since occupancy has already recovered to pre-pandemic levels. Our SHOP assets are continuing to recover, and projected to grow at approximately 25% to 30% in 2024. Outpatient medical could be flat to slightly down, with more on that in a minute. And the remaining triple-net lease portion of our portfolio should be up approximately 1% to 3% on a same-store basis. Please remember that our same-store pools for the Integrated Senior Health Campuses and SHOP include only about two-thirds of those combined beds in 2023, which means that our overall company net operating income should grow by more than just the same-store NOI growth rates. Regarding the outpatient medical segment guidance, we have some known vacates coming up at the beginning of this year, which will reduce occupancy. And when factoring in the time to lease up and build out tenant spaces, we expect to have lower growth in the short-term. Over time, we expect the outpatient medical segment to grow in the 2% to 3% range, subject to expirations or incremental additional leasing. With respect to capital allocation, at our current cost of capital, coupled with our desire to maintain a conservative leverage profile, we will be judicious in what acquisition and development opportunities that we pursue going forward. The exception is the portfolio of senior housing assets we took over last month in Oregon, discussed earlier, which won't be in the same-store portfolio for some time. We continue to expose existing assets in a measured way to the market or potential disposition. Although our desire to transact will be based in large part on the resulting pricing that we are able to attain since we have no need or desire to sell assets at unreasonably high cap rates. We are excited for the opportunity to execute on our plan as a publicly traded company throughout 2024 and beyond. And with that, operator, I would like to open it up for questions.

[Operator Instructions] Your first question is from the line of Joshua Dennerlein with Bank of America. Please go ahead.

Hi, everyone. This is [indiscernible] on behalf of Josh Dennerlein. Thank you for the question. I wanted to know, can you help us understand the trajectory for the same-store margin for Trilogy and the RIDEA portfolio? What do you assume in the guidance for the year? And then second to that would be, where are you thinking about the long-term same-store margins for both segments?

We've seen margins continue to improve throughout last year, and our expectation is we'll continue to see that. I firmly believe that we will get back to margins that we saw pre-COVID. I don't know how long it's going to take. I think a big part of that is going to be through occupancy growth. I expect and hope that occupancies will continue to grow and will surpass what we saw as far as pre-COVID occupancies. I think that's going to play a big part as far as continuing to show margin improvement. Anything you want to add, Brian, as far as where we expect, we may be ending of the year?

No, I think that's fair. I think we're obviously not projecting margins in our guidance, but we are seeing strength in those numbers over time. And growth gets supercharged with the increasing occupancies.

Great. I appreciate it. Thank you.

Thank you for the question.

Your next question is from the line of Ron Kamdem with Morgan Stanley. Please go ahead.

Hey, Ron.

Hey. Thanks so much. Just first one on the – just on interest expenses. I think you talked about $68 million of dispositions to pay down debt. Just any sort of ballpark where – what's baked into the guidance on the interest expenses for this year? And what's sort of a good run rate?

Yes. So the pro forma, the offering with the paydowns, we have approximately $1.7 billion of debt remaining on a pro rata basis. Our weighted average interest rate since we retired the bulk of our floating rate debt is probably in the 5% range. And the use of proceeds from dispositions would be used to pay down debt with the goal that the debt we're paying down is higher than our weighted average rate so probably looking in the 7% range. The hope is that from the dispositions, we are continuing to expose assets to the market and evaluating the pricing that we're able to get. We're not in a rush to sell assets unless we get really good prices. But ultimately, I think that $68 million that I described earlier that we've embedded in the growth projections or the guidance, I think that could be done in the first half of the year. We may continue to – we will continue to expose assets. We may be able to continue to close on additional dispositions, but we can refine guidance as the year wears on.

Great. If I can just sneak one more in. Just going back to the same-store guidance for the integrated senior health campus and the SHOP. I guess, number one, sort of what occupancy assumptions just high level are going into that? Is it sort of a similar occupancy gains of the last year? Is it greater? Is it less? And then are there any things such as operator transitions or anything else that we should be sort of mindful of that could potentially make those numbers a little bit more conservative? Thanks.

So this is Danny. I'll start out and maybe hand it over to Gabe. So we had a very strong occupancy growth last year. I think we are not guiding to that same type of occupancy growth in 2024. I think we're looking at Trilogy, correct me if I'm wrong, Gabe, kind of being in the high-80s by the end of the year. I think the rest of the SHOP portfolio kind of in the mid-80s, continued margin improvement. And so far, so good, but I think we'll continue to update those numbers as we close out each quarter over the next 12 months.

Yes. And I'd just say, I mean, we continue to have pretty deep conviction in Trilogy being one of our best operators in the portfolio. What they've been able to do for the last eight years now even through COVID has been pretty impressive. They've got multiple levers that they can pull to beat where we expect them to be. And it could come through occupancy, it could come through rate, it could come through expense management. So there are a number of factors that we're looking at there that could help improve the margin and actually beat where we're forecasting NOI to be, but we don't want to be overly aggressive in assuming that all of those things are going to come together at the same time to have a perfect scenario. So what happens through 2024, we still think the fundamentals are really strong in that business. We still think, especially on the senior housing side of that business, that they've got room to grow from an occupancy perspective. So we'll see what 2024 holds.

And anything on operator transition?

I think we're done with that. We – our goal was to get the transitions more or less completed prior to the IPO. We had the last one commenced this month. We've got two assets in Omaha, where we brought in a new regional operator, someone local who knows the market, who already operates in the market, it does very well. And that is that. We do not anticipate any more operator change outs anytime in the near future.

Thanks so much.

Thanks for the questions.

Your next question is from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

Hey, Austin.

Great. Thanks. Good morning, everybody. Good morning, Danny. Just want to revisit the occupancy piece within the Integrated Senior Health Campuses. You mentioned, with response to the last question, kind of reaching the high 80% range. I think you finished 2023 averaging around 85.7%. But then you also said you don't expect it to be quite the same level of growth. So you did 300 basis points last year. I mean, should we be thinking a couple of hundred basis points as what's embedded in guidance? And then we'll kind of see how, as we get into the more peak season of that business, where things and kind of how the year starts to play out? And then also curious if you're assuming that things return to kind of normal seasonality in this business as you saw a little bit of that dip in the fourth quarter of this past year?

Yes. Well, remember Trilogy is a little bit of a different animal, right? Because it's not just pure AL. It's more than half skilled. And not only that, it's short stay, high acuity scale. The average length of stay at Trilogy is measured in weeks, not months. So Trilogy, if you look at Trilogy's performance over the last couple of years, average length of stay has actually come down but the number of admissions has gone way up. So the occupancy at Trilogy tends to be a lot more choppy on the skilled side. Both sides of the business have been growing very well, but AL has been smooth and steady and skilled has trended up, but it's been much more choppy. A lot of – and seasonality at Trilogy is different. For example, because a lot of – the majority of admissions in the skilled side of the business are hospitals, discharged patients. And a lot of times, they had – sometimes they were hospitalized in emergency basis. A lot of times, it's a little bit more discretionary like a hip replacement, for example. So what we see is typically, before a holiday weekend, Christmas, for example, is a great example of that, we always see a big drop off the week before Christmas because anything that can be delayed, they'll delay until January. And then you see a big pickup in the first or second week of January. So it's much more choppy with Trilogy, a little bit harder to forecast. What we're very pleased to see is that the overall trend continues to go up. And that's really what we're focused on. And we expect and hope that to continue.

And I'd just add to that, Austin. You saw quarter-over-quarter, occupancy came in a little bit at Trilogy but NOI grew by 13.5% quarter-over-quarter. So to my earlier point, occupancy is one lever that they have to really drive the NOI but you kind of have to sensitize the different levers that they have. It could come from occupancy, it could come from rate growth, it could come from expense management, it's not just dependent on hitting a certain occupancy target.

That's a great point. I mean, with respect to maybe mix then, is there anything – last year, the Q-mix kind of – we saw a little bit of change within the Q-mix as a percentage of revenue. I mean any – do you expect that to continue to come down or sort of stabilize with where that was in the fourth quarter or for the full-year last year?

If anything, I think the Q-mix is going to continue to go up. Our senior housing business is growing really fast, and they've made investments on the sales and marketing team, both from a human capital side and otherwise. And where we're looking to grow that business, I think, right now, which is kind of exciting is in their independent living villas. They've got the villa concept, which I think some of the people on the call have seen before, where it's a duplex. You've got your own kitchen, you've got your own garage, you've got your own neighborhood basically that you live in with one kind of club house. And that product runs at about 95% occupancy. So to the extent that we can continue to expand the number of villas that they have on their campuses. And we've got opportunities where we already control the land, and we're shovel-ready with projects to do that, I think that would further, obviously, increase the amount of private pay in the Trilogy portfolio and be an interesting area for growth.

Thank you. And then just last one for me. I know it's been a month and a half or so since the IPO, but the stock has performed well since then. And I'd just be curious to hear the team's latest thoughts on how you're thinking about executing on the Trilogy purchase option from a timeline perspective as well as what's the most attractive financing options to fund the purchase? Thank you.

Yes. This is Danny. I'll take that one. So we get this question a lot, obviously. We view that purchase option as a terrific benefit for AHR. We've got a lot of flexibility as far as timing and methodology of exercise. So we have a little over year and a half to exercise that option. We can do it anytime we want between today and September 30, 2025. And we have flexibility as far as methodology. We can use cash, we can use preferred equity, we can use a mix. And on the one hand, we would clearly like to do it sooner rather than later because it's very accretive to earnings. Now the value creation of Trilogy is going to inert to us whether we exercise it today or next year. Trilogy becomes – grows more valuable as time goes by, in our opinion. And at the end of the day, our hope is that we will own 100% of Trilogy. So all that value will inert to AHR. But we've gone through a lot of effort over the last couple of months to get our balance sheet to a position that it's in today with the debt-to-EBITDA in the low-6s, as Brian discussed in his comments. And our goal is to keep it there. So the price does go up a little bit on that option over time. Trilogy’s NOI grows at a much faster clip. So our cap rate actually increases the longer we wait, but our goal is to sometime between now and the next year and a half to between asset sales, potentially going back out to the market for new equity, organic EBITDA growth and external EBITDA growth as well to reach a point where we can exercise that option while maintaining the type of leverage that we're seeing today. So we'd like to get it done, but we're no – there's no sense of urgency. We don't have to do it this year or early next year. We can delay it if we want. And we made a promise to everybody out there who invested that we will maintain the type of balance sheet that we've achieved, and our goal is to continue to do that.

All right. Thanks everyone. Appreciate the time.

Your next question is from the line of Michael Griffin with Citi. Please go ahead.

Hey, Griffin.

Thanks. Hey, what's up guys? Maybe going back to a question on the guidance. So Brian, you kind of laid out the levers in your prepared remarks, but if I take the midpoint of Trilogy, SHOP, MOBs and triple-net on kind of a weighted average basis, I'd get to about 7%. So just curious what the delta between that and your guidance of call it, 6% at the midpoint would be?

Well, understanding we're not guiding to the midpoint, we're simply laying out the best case scenario and the not downside, but the low and the high end. I think the difficult challenge in doing this is that numbers move around, and some things trend better than you'd hoped and some things trend worse, but ultimately, we're comfortable in that range. I don't disagree with your math. Applying weighted average percentages of our portfolio to the guidance. But ultimately, it's difficult to say today what it's going to look like after 12 months.

Yes. That's helpful. And then maybe a kind of broader portfolio level question, particularly as it relates to Trilogy. Obviously, you guys are the first publicly traded healthcare REIT with the SNF and the RIDEA exposure. Obviously, these are operationally intensive businesses, kind of similar to SHOP. But I mean, how big a worry is sort of stroke of the pen risk to this business, I guess, combined with its operational nature as well?

I'll take that one. Griff, it's Gabe. So there are a few different things at Trilogy that make it attractive for us. And when we came into this investment eight years ago, these were kind of the critical factors that we like. We like that it was a unique assay class that serve seniors better than any other product that we had seen out there with the skilled nursing and assisted living and independent living all on one campus. We like that the operator was kind of a best-in-class operator that had proven performance. And that, by the way, has proven to be true for the last eight years that we've owned them. We like that they have a physical plan advantage on their competitors with the average age of facility under 10 years. And we like that we have the right alignment there with the Trilogy management team. They're essentially a captive management team. They manage all of the Trilogy investments for us, that's 127 assets, I think, at this point. And their business and our business are very aligned in that the management team at Trilogy makes money off of an incentive plan that incentivizes the bottom line, FFO growth, EBITDA growth. So from a broader SNF RIDEA perspective, I think if you don't have all of those things all together at the same time in an investment that's truly unique at Trilogy, you might have different concerns about entering into that type of structure. But with Trilogy, we feel comfortable. And by the way, this has proven itself out over the last eight years, that they're the right partner to do it with, that we created the right alignment with the management team and the outside operator to make it work. And we feel good about the future of Trilogy. I mean they've got a growth profile that if you were doing a triple-net lease in the skilled nursing business, you wouldn't be able to unlock. So the risk reward there with the factors that I went through made it so that Trilogy makes sense for us and we're excited about their growth and we're excited about the potential there.

Yes. This is Dan. I just want to add on to that real quick. So we would not do a structure like this with any other operator besides Trilogy. And Gabe's right, we owned Trilogy for about 8.5 years. But Stefan and I, back in our Healthpeak days almost 25 years ago, we've known Trilogy since the late '90s, early 2000s, we had a portfolio with Trilogy at Healthpeak. And they were our best operator back then, and they're our best operator today. And not only that – and one of the things we're trying to instill across our portfolio is really that Trilogy's focus on care and service. And I think that's one of the reasons they've been so successful, is when you look at Trilogy's, what they're focusing on, yes, we all like bottom line performance, we all like occupancy, we all like margins and NOI growth. But Trilogy has always put care as their number one focus, service and care, and we've been trying to instill that with everybody else. And we've got our Operator Summit coming up first week of April. We will have all of our operators meet here in California. And that's a big focus, is we want that to be – we want that to be the number one focus of all our operators, is if you can't provide good care and service, then everything else really doesn't matter. You're not going to do – you're not going to perform well in the long-term. All those other metrics are related. And one of the reasons Trilogy's done so well is because of the move to value-based care. And they've been able to capture the upside, not just at the federal level, but at the state level because they've got better outcomes, less recidivism, they've got higher staffing because of their high level of acuity and they've really been able to outperform because of their focus on care and outcomes. And like I said, we're not looking to have any – we're not looking to bring any other type of skilled operators into this kind of a structure. We're comfortable with Trilogy. I'm not looking to expand with anyone else outside of Trilogy.

Great. That's it for me. Thanks guys.

Your next question is from the line of Michael Carroll with RBC Capital Markets. Please go ahead.

Yes. Danny or Gabe, can you talk about some of the transactions that you might have within Trilogy, either through new developments or redevelopment projects? I know there are some pretty good return characteristics in those types of investment. I mean, are you underwriting those today? Or are you still trying to kind of maintain your balance sheet and think about that in the future, like you are with the purchase options?

We have about 600 million of opportunities today with Trilogy, about 500 million of that is the purchase option, right? And then we've got – as Gabe talked a little bit about the IO villas, we've got five campuses where we already have the land and we can start those projects immediately. And then there's some expansion opportunities within Trilogy as well. And some of it needs to be underwritten, some of it doesn't. I didn't even talk about the lease purchase options. So last year, we mentioned in the comments that we exercised purchase options on three Trilogy leases at a cap rate just north of 9%, and that's – there's really nothing to underwrite there, right? It's simple math. We were paying a little over 9% lease rate. We bottom out so that 9% went away. So that was a north of a 9% cap. We have three more of those available today where I believe our cap rate is about 9.25%, it's a little bit higher so nothing to underwrite. So most of our Trilogy opportunities are already assets that we own and control and operate and manage, it's just a matter of exercising options. Now we do have the independent living villas, which there is underwriting involved there. Those are not as risk-free as just buying out leases. However, it's a 12-month build. And historically, they've achieved a very, very high single-digit yield on those. And they're – as Gabe mentioned, they're about 95% leased and they typically lease up prior to completion and construction. So that's kind of the hurdle we're looking to be as we kind of want to be north of 9%, and we want to have it be very low risk and a very quick 9%. So Trilogy really meets all of those criteria. And it's really just a matter of prioritizing what we want to do first, while maintaining the balance sheet that I talked about earlier.

Okay. And do you have any of those investments, I guess, included in guidance, like maybe the purchase options? I'm assuming those are exercisable this year?

No, no, nothing is embedded in the guidance.

Okay. And those purchase options, when are they exercisable? The three that you mentioned that you could have done at nine plus.

They're exercisable today, and I don't like to give forward-looking statements, but there's more to come on that.

Okay. Great. And then just last for me. Can you remind us how much of Trilogy does AHR not owned outside of the purchase option? I think that's on the management team members have a little stake. I mean how much of that is outstanding? And is there a potential for you to acquire them out so your ownership stake in Trilogy could increase maybe a little bit without exercising the bigger purchase option that you have?

Yes. So the management team at Trilogy, the CEO, CFO and a few others own a percentage of Trilogy, and they have from the beginning. And that's about 0.8% of the total enterprise. There are – they do have the option to put that equity to AHR, and we expect them to do that and to own ultimately a higher percentage of it.

Yes. So today, we own about 76% of 99.2%. Now, if you are asking, is there a pathway to 100% ownership, we believe there is.

Okay. Great. Thank you.

Your next question is from the line of Anthony Powell with Barclays. Please go ahead.

Hey.

Hi. Good morning. How's it going? I guess a question on, I guess, your rate growth assumptions for Trilogy and SHOP in 2024. What are you seeing in terms of rate growth and how it's compared to 2023?

So in 2023, January of 2023, and remember, it's not like everybody's rent goes up January 1, right? If somebody moved in, in the middle of the year, they get 12 months before their rent month. So it kicks in over time, right? And of course, there's been a lot of move-ins in 2022 and 2023. So – but they did across the board, 9.75% increase January 1, 2023. In January 1, 2024, it was typically between 6% to 8%. I think to Trilogy, I think it was more like 7.5%, 6% to 8% was kind of portfolio as a whole. So the data across the board, 7.5% increase, that's not just in AL and IO, that's on private pay skilled as well, but it doesn't all kick in January 1. So anybody who moved in midyear is going to see their increase on their 12-month anniversary.

Got it. Thanks. And maybe more broadly, it seems like you're growing a lot both externally and internally in SHOP and Trilogy. What's the ideal exposure to triple-net and MOB long-term? Kind of, are you expanding there? Are you shrinking there? What's your views on those businesses as segments for you down the road?

Well, I think risk-adjusted returns change over time. As you've heard on this call in our prior conversations, we've been reducing our exposure to medical outpatient. Today, I think Gabe mentioned it was about 27% of Q – or I mentioned, excuse me, it was about 27% of Q3 NOI. I remember not that long ago, it was 35%. So we've been reducing our exposure to medical outpatient. And meanwhile, the rest of our NOI has been growing. So we like medical outpatient. There's nothing wrong with the segment. It was great during COVID. It held up really well. We actually increased our occupancy in 2020. That being said, we're seeing much lower growth on medical outpatient than we are in SHOP and Trilogy. So doesn't mean we won't be buying it in a couple of years or three years. We'll see what the market does. But today, that's probably a sector that we're reducing our exposure as opposed to increasing it.

And similarly, on the other triple-net side, we're not growing. We're not growing externally right now aside from some select things at Trilogy. So we're not out there looking for portfolios. I do know that we have extremely high standards on rent coverage. And I don't know if we would be the most aggressive buyer, there may be others that would be willing to live with a lower coverage on those.

I think it's well said.

Got it. And maybe one more housekeeping on maintenance CapEx. What was it in total for the portfolio in 2023? And what should we expect there for 2024?

So I'd tell you, I would direct you to the supplemental. We've layered in some new information for people to be able to underwrite the kind of maintenance CapEx. You'll see it on each of the segments. We have four segments. On three of the segments, we have maintenance CapEx. On Trilogy, which is the IHSC on SHOP and on the outpatient medical, it's on bottom line of the top section of page four, six and nine, you'll be able to see what the maintenance CapEx was for each of those. Obviously, there's no maintenance CapEx on the triple-net side. If you do spend money, you have a resulting increase in rents. But I think generally, we've been pretty clear. First and foremost, I would just guide you that it's a very choppy and can even be seasonal, thinking about if you're going to repave a parking lot, you can't really do that if there's snow on the ground. So those things might have to happen in warmer weather, same as like a roof replacement and things like that. Generally speaking, we guide people to about $900 to $1,000 a foot at Trilogy and – or excuse me, not a foot, a bed, and we guide about $800 to $1,000 a bed on our SHOP portfolio. And then on the MOB side, again, it's heavily dependent on the amount of leasing that we do in any given quarter or year. But ultimately, I think $4 a square foot is a pretty good number for us. Now the numbers bounce around significantly. And if you do the math on what it looks like in 2022, 2023, they're sort of all over the math. But ultimately, long run, I believe in the numbers that we've just talked about as far as run rates go. A little lower on MOBs this year, frankly, that had to do with switching out operators. If you have an older operator that you discover – excuse me, on SHOP, if you have an operator that you believe is not necessarily part of your portfolio on an ongoing basis, you don't allocate as much CapEx to those guys. And then you wait until you get the new operator in. And then they need to get their feet under them and ultimately decide where they want to deploy dollars. So on the SHOP side, the CapEx spend was a little lower in 2023. I expect it to get back up to that $800 to $1,000 in 2024. And then on the SHOP side – or excuse me, on the Trilogy Integrated Senior Health Campuses, they actually spent more this year than that sort of $900 to $1,000. And the reason was there's a lot of sort of nonrecurring and even some home office spend there. They had done – they bought some new buses for campuses. They bought $815,000 in ultraviolet disinfecting equipment. They did a bunch of roof replacements. They even remodeled part of their home office. So it's above $1,000 a foot for those guys, but most of it was nonrecurring. I think what you'll notice is that our numbers are not contrived. We sort of just take what's the maintenance CapEx and we put it in there. And as a result, I think you're going to see a little bit more volatility in those numbers. But still feel comfortable over time with the dollars that I gave you.

Thanks for all the details. Appreciate it.

[Operator Instructions] Your next question is from the line of John Pawlowski with Green Street. Please go ahead.

Hi, John.

Good morning. Thanks for the time. I have a few questions on the MOB portfolio. So with roughly 25% of your leases expiring this year and next year, curious, Danny, how much occupancy loss do you expect over the next two years as these leases roll?

So I think in general, we're not – I mean the only – we're expecting a little bit of occupancy loss this year because of known vacates. And the majority of the vacates that we're seeing is due to hospital consolidation. So in years past, if a tenant didn't renew very often, it's because they were moving into a new build, new construction. And that's shifted over the last four, five years. And now with the exposure to health system leasing, which has been increasing, as we all know, the main reason we see a tenant not renew is because of consolidation. So we had a couple of move-outs this year that we knew about. They're working on re-leasing them. And we are confident that they will get re-leased. I mean there's a lot of activity out there. But between the time to re-lease and the time to get the new tenant in and paying rent, you get some downtime. We saw this a couple of years ago as well where we had some – a drop in occupancy, we re-tenanted, and it's kind of one of the reasons we had pretty good same-store growth in the first half of last year is because we had – we did some re-tenanting in 2022. So the only major lease that I know of that is significant. We do have a lease that expires July 31 of next year, 2025. It's a sizable lease. It's Diversity Health System. It's primarily administrative use. They waffled back and forth as to whether they want to stay, whether they want to leave. The latest we've heard from them is they want to keep part of it. So I know that on our long-term guidance that we provided to the analysts most recently, I think we talked – I think we had them not necessarily leaving – I'm sorry, not necessarily staying. The latest information we have from them is they want to keep part of it. So it remains to be seen. But we've seen retention typically between 80% to 90%, very consistently over the last few years, and I don't expect that to change.

Yes. And John, I'll just amplify that a little bit. We aren't giving guidance specifically on occupancy. But I can tell you that occupancy at 12/31/2023 in the MOB space, medical outpatient was 89.2%. I think it's going to show some weakness early in the year when those vacates – some of those vacations we knew about, some of them we didn't. But ultimately, I would imagine we're going to grow back pretty close to the end of the year, not too far off from where we started the year. And then that's sort of why we're guiding people down a little bit on the NOI. You're going to – it takes a little while to build out space. It takes a little time to find the tenant to sign them up to get that rent to commence. But ultimately, it results in a lower NOI, but ultimately, I think the occupancy gets pretty close back to where we were to start the year.

And NOI growth within our medical outpatient has always traditionally been choppy. You get – our portfolio is small enough to where you have one or two big tenants not renew, and it impacts us. We're not – we don't have that much medical outpatient.

Okay. I know it's a long time off, but when you look at those leases you alluded to, that there's some in administrative space coming back in 2025 as best as you can tell right now, 2025, another year of kind of 0% NOI growth before you revert back to a 2% to 3% historical norm?

It's really hard to say. I mean I think the historical norm is indeed the norm, but it's very hard to predict from a – as far as which years will be up and which years will be down.

Okay. Can you share what percentage of your MOB leases are backed by investment-grade credit?

We don't track it in total. You can look on the supplemental on Page 7. You can see that our by largest, obviously, and we've got their credit rating there, it's not to say that any of the other 79% of our tenants don't have credit ratings, but it's not enough that it made the top of the list.

Yes. If you look at Atrius Health, which is our fifth largest, it was 2.2%. So if you can imagine, everybody else is very small. We don't have any large tenants with significant exposure.

Very much of a multi-tenant portfolio with 90% of our space being multi-tenant.

Okay. But should we interpret the bulk of that 80% not being investment grade?

I would say it's a lot of – we still have a lot of physicians in the building who – we've got a lot of health systems who may or may not be investment grade.

I'm certain there's some in there that are, but I wouldn't say the preponderance.

Okay. Last one for me, if you'll hear another question. Can you just help me think, I know you restructured the dividend before the IPO, but how you thought through the level of dividend? And why not give yourself more cushion here with – at least for this year, it looks like AFFO will be below level of dividend?

I think that we debated that a lot. And we just felt it didn't make sense to cut it just to turn around, have to increase it in 2025. I think if you look at the spend, the additional spend that maintain the dividend for 2024, it wasn't that material. And we have very, very – we have a lot of confidence that we'll go back to where we need to be in 2025. If that was not the case, we probably would have addressed it, but we just didn't feel there was a need to.

Okay. Thanks for all the time.

Thanks.

Your next question is from the line of Barry Oxford with Colliers. Please go ahead.

Hi, Barry.

Great. Thanks, guys. Obviously, a lot of my questions have been answered. But when you're looking at the $68 million in dispositions, what property types do you see that kind of coming from that you've kind of earmarked?

It's primarily medical outpatient. Everyone's well, we'll sell a one-off long-term care facility, but most of what we've been selling for the last 1.5 years has been medical outpatient.

Okay. And you wouldn't consider selling anything inside Trilogy?

We actually, occasionally do sell a facility in Trilogy. That's something we do regularly. But first of all, sometimes they'll buy an older asset and build a replacement facility. So we'll sell the older one. But I would say, not every year, but in many years, we'll sell one or two Trilogy buildings. And typically, it's maybe an older building, something they acquired as opposed to purpose-built, but not necessarily. So they do have – like any other portfolio, it's 125 buildings, and we constantly evaluate the property. And if there's one or two that makes sense to dispose them, sometimes we'll try – we'll expose some to the market, and we may not get the price and we'll keep it.

Great. Perfect. Thanks, guys.

Thanks, Barry.

And at this time, there are no further questions. I will turn the call back to Danny for closing remarks.

All right. Well, thank you, operator. We appreciate your help. And thank you very much to everybody who joined us on the call. I can say, we've got a lot of people who joined us. So I can see – I don't see exactly how many, but I can see, it's a long list. We're very excited. This is our first call as a publicly traded REIT, and we look forward to many more. And we're very excited about the prospects for this year and the next several years. So thanks, everybody. Have a great weekend.