American Healthcare REIT - Q4 2023

Transcript

Operator (participant)

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 speaker's remarks there will be a question and answer session. If you would like to ask a question during this time simply press star then the number one on your telephone keypad. To withdraw your question press star one again. I would now like to turn the conference over to Alan Peterson, Vice President, Investor Relations and Finance. Please go ahead.

Alan Peterson (VP of Investor Relations and Finance)

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 the 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 22nd, 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.

Danny Prosky (President and CEO)

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. From 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 year and a half. For those of you who are still getting to know us we're a diversified healthcare REIT with approximately 57% of our net operating income as of the end of the fourth quarter in 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 are unique among listed healthcare REITs. To put it simply, our Trilogy assets are full service, catering to 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 30th, 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 Portfolio 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 at 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 lease segment, we own and 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.

Gabriel Willhite (COO)

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 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%-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 in 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're 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 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're 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're 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 releasing 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're 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.

Brian Peay (CFO)

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 paydowns and utilizing our Q4 2023 annualized adjusted EBITDA, we project that our net debt to annualized adjusted EBITDA should be in the low six times 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-$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%-7% same-store portfolio growth involves the integrated senior health campus segment growing in the 8%-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%-30% in 2024. Outpatient medical could be flat to slightly down with more on that in a minute and the remaining triple net leased portion of our portfolio should be up approximately 1%-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%-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 for 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. With that, operator, I would like to open it up for questions.

Operator (participant)

At this time I would like to remind everyone in order to ask a question simply press star then the number one on your telephone keypad. Your first question's from the line of Joshua Dennerlein with Bank of America. Please go ahead.

Ronald Kamdem (Managing Director)

Hi everyone. This is Sarah Granath on behalf of Joshua 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 the guidance for the year and then second to that would be what are you thinking about the long-term same-store margin for both segments?

Danny Prosky (President and CEO)

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 and 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 at the end of the year?

Brian Peay (CFO)

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.

Ronald Kamdem (Managing Director)

Great. I appreciate it. Thank you.

Danny Prosky (President and CEO)

Thank you for the question.

Operator (participant)

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

Danny Prosky (President and CEO)

Hey, Ron.

Ronald Kamdem (Managing Director)

Hey, hey, thanks. 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?

Brian Peay (CFO)

Yeah, 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. 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 for the guidance I think that could be done in the first half of the year. 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.

Ronald Kamdem (Managing Director)

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 I number one sort of what occupancy assumptions just high level are going into that? Is it sort of a similar occupancy gains as last year? Is it greater? Is it less? And then are there anything 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.

Danny Prosky (President and CEO)

Yeah, 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.

Gabriel Willhite (COO)

Yeah, 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.

Ronald Kamdem (Managing Director)

Anything on operator transitions?

Danny Prosky (President and CEO)

I think we're done with that. 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 and does very well, and that is it. We do not anticipate any more operator changeouts anytime in the near future.

Ronald Kamdem (Managing Director)

Thanks so much.

Gabriel Willhite (COO)

Thanks for all the questions.

Operator (participant)

Your next question's from the line of Austin Wurschmidt with KeyBank Capital Markets. Please go ahead.

Danny Prosky (President and CEO)

Hey Austin.

Austin Wurschmidt (Director and Senior Equity Research Analyst)

Great. Thanks. Good morning everybody. Morning Danny. Just want to revisit the occupancy piece within the Integrated Senior Health Campuses. You mentioned in 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 hundred basis points is 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.

Danny Prosky (President and CEO)

Yeah, well, remember Trilogy's 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 skilled. 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 it and in seasonality at Trilogy's different.

For example, because a lot of the majority of the admissions in the skilled side of the business are hospital discharge patients and a lot of times they had sometimes they were hospitalized on an emergency basis. A lot of times it's a little bit more discussionary, 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 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.

Gabriel Willhite (COO)

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. 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.

Austin Wurschmidt (Director and Senior Equity Research Analyst)

No, 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?

Gabriel Willhite (COO)

If anything I think the census mix is going to continue to go up. Their 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 clubhouse. And that product runs at about 95% occupancy.

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.

Ronald Kamdem (Managing Director)

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 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.

Danny Prosky (President and CEO)

All right. Yeah, 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 a year and a half to exercise that option. We can do it anytime we want between today and September 30th of 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 inure to us whether we exercise it today or next year. Trilogy grows more valuable as time goes by in our opinion.

At the end of the day our hope is that we will own 100% of Trilogy so all that value will inure to AHR. But we've gone through a lot of effort over the last couple of months to get our balance sheet to the position that it's in today with the EBITDA in the low six as Brian discussed in his comments. 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 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've 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.

Ronald Kamdem (Managing Director)

Got it. Thanks everyone. Appreciate the time.

Operator (participant)

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

Danny Prosky (President and CEO)

Hey Griff.

Ronald Kamdem (Managing Director)

Great. 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.

Brian Peay (CFO)

Well, understanding we're not guiding to the midpoint. We're simply laying out the best case scenario and the, well, 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.

Ronald Kamdem (Managing Director)

Yep. No, that's helpful. 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?

Gabriel Willhite (COO)

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 liked.

We liked that it was a unique asset class that served 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 liked 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 liked that they have a physical plant advantage on their competitors with the average age of facility under 10 years. We liked 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 and 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. 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.

Danny Prosky (President and CEO)

Yeah, and this is Danny. 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've 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 1990s 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 where we'll have all of our operators meet here in California. And that's a big focus is we want that to be what 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 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 higher 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 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.

Ronald Kamdem (Managing Director)

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

Operator (participant)

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

Michael Carroll (Managing Director and Senior Equity Analyst)

Yeah, 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's some pretty good return characteristics in those types of investments. 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?

Danny Prosky (President and CEO)

So 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 IL 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. So 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 there's really nothing to underwrite there, right? It's simple math. We were paying a little over a 9% lease rate. We bought them out so that 9% went away. So that was north of a 9% cap.

We have three more of those available today where I believe our cap rate's 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 as Gabe mentioned they're about 95% leased and they typically lease up prior to completion of construction.

That's kind of the hurdle we're looking to beat, is we kind of want to be north of a nine and we want to have it be very low risk and a very quick nine. 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.

Michael Carroll (Managing Director and Senior Equity Analyst)

Okay. 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.

Gabriel Willhite (COO)

No. No. Nothing is embedded in the guidance.

Michael Carroll (Managing Director and Senior Equity Analyst)

Okay. And those purchase options, when are they exercisable, the three that you mentioned that you could have done at 9+?

Danny Prosky (President and CEO)

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

Michael Carroll (Managing Director and Senior Equity Analyst)

Okay. Great. And then just last for me can you remind us how much of Trilogy does AHR not own outside of the purchase option? I think some of 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?

Gabriel Willhite (COO)

Yeah. 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. 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.

Danny Prosky (President and CEO)

Yeah. So today we own about 76% of 99.2%. Now, if you're asking, is there a pathway to 100% ownership?

Gabriel Willhite (COO)

We believe there is.

Michael Carroll (Managing Director and Senior Equity Analyst)

Okay. Great. Thank you.

Operator (participant)

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

Anthony Powell (Equity Research Analyst)

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?

Danny Prosky (President and CEO)

So in 2023, January of 2023, and remember it's not like everybody's rent goes up January 1st, right? If somebody moved in in the middle of the year they get 12 months before their rent bumps. 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 1st of 2023. January 21st January 1st of 2024 it was typically between 6%-8%. I think to Trilogy I think it was more like 7.5. 6-8 was kind of portfolio as a whole. So they did across the board 7.5% increase. That's not just in AL and IL that's on private pay skilled as well but it doesn't all kick in January 1st.

So anybody who moved in mid-year is going to see their increase on their 12-month anniversary.

Anthony Powell (Equity Research Analyst)

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 kind of segments for you down the road?

Danny Prosky (President and CEO)

Well, I think risk adjusted returns change over time. As you've heard on this call and in our prior conversations we've been reducing our exposure to medical outpatient. Today, I think Gabe mentioned—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 it doesn't mean we won't be buying it in a couple 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.

Gabriel Willhite (COO)

And similarly on the other triple-net side, 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.

Anthony Powell (Equity Research Analyst)

I think it's well said. Got it. 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?

Gabriel Willhite (COO)

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 ISHC 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 recoup 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 a roof replacement and things like that. Generally speaking we guide people to about $900-$1,000 a foot at Trilogy and or excuse me not a foot a bed. And we guide about $800-$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 sq ft is a pretty good number for us. Now the numbers bounced around significantly and if you do the math on what it looks like in 2022 2023 they're sort of all over the map.

But ultimately in the 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, as 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 800-1,000 in 2024.

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 900-1,000. And the reason was a lot of sort of non-recurring 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 non-recurring. 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.

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.

Anthony Powell (Equity Research Analyst)

Thanks for all that detail. Appreciate it.

Operator (participant)

Once again, if you would like to ask a question, simply press star then the number one on your telephone keypad. Your next question's from the line of John Pawlowski with Green Street. Please go ahead.

Danny Prosky (President and CEO)

Hi John.

John Pawlowski (Managing Director)

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?

Danny Prosky (President and CEO)

So I think in general, we're expecting a little bit of occupancy loss this year because of known vacates. 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 a new construction. And that's shifted over the last four or 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've had a couple move outs this year that we knew about. They're working on releasing them and we are confident that they will get released.

I mean, there's a lot of activity out there, but between the time to release and the time to get the new tenant in and paying rent, you get some downtime. We saw this a couple years ago as well, where we had some drop in occupancy. We re-rented it, and it's kind of one of the reasons we had pretty good same-store growth the first half of last year, because we did some re-renting in 2022. So, the only major lease that I know of that was significant. We do have a lease that expires July 31st of next year, 2025. It's a sizable lease. It's the Mercy Health System. It's primarily administrative use. They've 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. 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%-90% very consistently over the last few years and I don't expect that to change.

Gabriel Willhite (COO)

Yeah. 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 vacates 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.

John Pawlowski (Managing Director)

Yeah. NOI growth within 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 don't have that much Medical Outpatient.

Gabriel Willhite (COO)

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

Danny Prosky (President and CEO)

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

John Pawlowski (Managing Director)

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

Gabriel Willhite (COO)

We don't track it in total. You can look on the supplemental on page seven and see that our five 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.

Danny Prosky (President and CEO)

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

Gabriel Willhite (COO)

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

John Pawlowski (Managing Director)

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

Danny Prosky (President and CEO)

I would say 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.

Gabriel Willhite (COO)

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

John Pawlowski (Managing Director)

Okay. Last one for me if you'll humor another question. Can you just tell me a thing? 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 the level of dividend?

Danny Prosky (President and CEO)

I think that we debated that a lot and we just felt it didn't make sense to cut it just to turn around and have to increase it in 2025. I think if you look at the spend, the additional spend to maintain the dividend for 2024 wasn't that material. And we have very very we have a lot of confidence that we'll get 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.

John Pawlowski (Managing Director)

Okay. Thanks for all the time.

Danny Prosky (President and CEO)

Thanks.

Operator (participant)

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

Danny Prosky (President and CEO)

Hi Barry.

Barry Oxford (Managing Director and Head of Real Estate Securities Research)

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?

Danny Prosky (President and CEO)

It's primarily medical outpatient. Every once in a while we'll sell a one-off long-term care facility but most of what we've been selling for the last year and a half has been medical outpatient.

Barry Oxford (Managing Director and Head of Real Estate Securities Research)

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

Danny Prosky (President and CEO)

We actually occasionally do sell a facility in Trilogy. It's not 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. 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 properties, and if there's one or two that makes sense to dispose of, sometimes we'll expose some to the market, and we may not get the price and we'll keep it.

Barry Oxford (Managing Director and Head of Real Estate Securities Research)

Right. Perfect. Perfect. Thanks guys.

Gabriel Willhite (COO)

Thanks Barry.

Operator (participant)

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

Danny Prosky (President and CEO)

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 see we've got a lot of people who joined us. I can see I don't see exactly how many, but I can see it's a long list. We're very excited. This was 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.

Operator (participant)

This does conclude the American Healthcare REIT fourth quarter 2023 earnings conference call. Thank you for your participation. You may now disconnect.