American Healthcare REIT, Inc. (AHR) Q2 2024 Earnings Report, Transcript and Summary

Hello and thank you for standing by. At this time, I would like to welcome you to the American Healthcare REIT Q2 2024 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 of Investor Relations and Finance. Please go ahead.

Good morning. Thank you for joining us for American Healthcare REIT's second quarter 2024 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 high-level commentary discussing our results of operations, financial position and other recent news relating to American Healthcare REIT. 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 made during this call other than statements of historical facts are forward-looking statements that are subject to numerous risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Therefore, you should exercise caution in interpreting and relying on them. I refer you to our SEC filings, including our earnings release furnished yesterday for a more detailed discussion of the risks that could impact our future operating results, financial condition and prospects. All forward-looking statements speak only as of today, August 6, 2024, or such other dates as may otherwise be specified. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During the call, we will discuss certain non-GAAP financial measures which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable measures calculated in accordance with GAAP are included in our earnings release and supplemental information package. You can find these documents as well as our SEC filings and the audio webcast replay of this conference call on the Investor Relations section of our website at www.americanhealthcarereit.com. With that, I will turn the call over to our President and CEO, Danny Prosky.

Thank you, Alan. Good morning and good afternoon, everyone and thank you for joining us today. As we enter the latter half of 2024, demand growth for healthcare real estate remains strong as evidenced by the performance of our diversified healthcare portfolio during the first half of the year, with 15.7% total same-store NOI growth in the second quarter of 2024 and 14.4% same-store NOI growth year-to-date. Within our 4 property segments, we continue to observe increased demand from an aging population which we expect will extend at least into the latter part of the decade. This demand and resulting internal growth within our portfolio is surpassing our original conservative estimates, prompting us to increase our guidance for both total portfolio same-store NOI and earnings for fiscal year 2024. Our anticipated same-store NOI growth for 2024 has been increased to a range of 12% to 14%. Revised normalized funds from operations guidance now stands at $1.23 to $1.27 per fully diluted share. Brian will provide more details regarding our revised guidance later in the call. I want to express my gratitude to the entire team here at American Healthcare REIT and our regional operating partners for their commitment to delivering excellent results for all of our stakeholders. Our team's hard work is demonstrated in our quarterly results. Reflecting on the current environment for healthcare real estate, I've spent 32 years working within the healthcare REIT space and have never been more optimistic about our business' growth prospects. The strength we have seen over the last 18 months within our industry is the most robust I have observed and the outlook for our company, at least over the next 3 to 5 years looks extremely promising. When evaluating our portfolio, I believe we are well positioned to continue delivering sector-leading performance within our managed portfolio which includes our integrated senior health campuses and SHOP segments. We are particularly excited about our assisted living exposure. Industry data from the second quarter shows that combined assisted living rate and occupancy growth has outperformed compared to other long-term care sectors for 11 consecutive quarters. Industry-wide assisted living occupancy now stands at approximately 85% in the second quarter of 2024 which equals pre-COVID levels. While we have exposure to all long-term care segments, the majority of our portfolio is within assisted living units and we are seeing the industry trend of AL outperformance within our portfolio, although our results are further surpassing certain benchmarks. Our same-store integrated senior health campus and SHOP segment occupancies exceeded the industry assisted living occupancy average in the second quarter of 2024. Our same-store SHOP assets coupled above industry average occupancy with accelerating RevPOR growth year-over-year in the second quarter. These results are a testament to the quality of our portfolio and the quality of our operating partners. While still early in our history as a traded REIT, we hope that through all the interactions with the investment community, we are establishing ourselves as leaders in both the public markets and the healthcare real estate sector. Nevertheless, with all the additional work, we're not losing sight of the strategic pillars outlined in our last earnings call. Number one, ensuring quality care and positive health outcomes for all residents and patients in our properties. I cannot emphasize enough how important this is to us here at AHR. Number two, committing to strong operating performance through our hands-on asset management approach utilizing best-in-class regional operators. And number three, demonstrating prudent capital allocation to optimize our portfolio's earnings and intrinsic value, focusing on attractive risk-adjusted returns. Looking ahead, I'm excited to continue executing our plans alongside the entire AHR team to achieve further growth across our diversified healthcare portfolio. I will now turn it over to Gabe to discuss our operational results in further detail.

Thanks, Danny. As Danny mentioned, we're thrilled to see robust levels of demand driving portfolio performance, particularly within our managed segments which accounts for approximately 60% of our pro rata cash NOI. Within our managed segments, our integrated senior health campuses operated by Trilogy Health Services continue to set the standard for healthcare operations across all levels of long-term care, particularly assisted living and skilled nursing. And you can see this reflected in our 24.1% year-over-year same-store NOI growth within that segment in the second quarter of 2024 compared to the same period in 2023. Trilogy's unique model, purpose-built facilities and strong reputation have continued to drive demand. Occupancy continued its sequential gains in the second quarter with a 20-basis-point increase from the results in the first quarter of 2024 and occupancy continued its climb higher subsequent to the end of the second quarter with spot same-store occupancy as of July 26, 2024, at 87.4%. Skilled nursing occupancy in particular, remains well above industry average, although we've seen some seasonality return to that segment, albeit to a lesser extent than historic norms and not enough to offset gains in other areas. I'm also excited to see the benefits of Trilogy's moat, as I've explained to many in the past, playing out in the results. The unique model and regional scale allow resources to be allocated efficiently across our campuses, providing a stable foundation for further margin expansion with continued top line growth and continued expense management which naturally ultimately leads to sustained NOI growth. Over the balance of 2024, with demand increasing for all care settings within the campus, skilled nursing assisted living and independent living, I expect our integrated senior health campuses occupancy to continue to grow. And of course, incremental occupancy gains would be expected to result in a higher pull-through to the bottom line. But again, because of Trilogy's unique business, we actually see multiple levers outside of occupancy growth for optimization and margin expansion beyond current levels. For example, as the operator of choice in its markets, Trilogy can focus on Q-mix and value-based care opportunities to provide for top line growth completely independent of occupancy growth. Another example, Trilogy's industry-leading employee retention which we've seen improving steadily, provides an opportunity for further expense management. Trilogy is constantly improving the employee experience which allows them to eliminate the need for agency nursing completely long ago and reduces unnecessary overtime expenses and the weighted costs associated with employee turnover. Now that being said, Trilogy's biggest advantage by far is that Trilogy is known for its high-quality care and we wholeheartedly believe that people see value in that and when making a decision, continue to want their loved ones in a Trilogy facility. In our SHOP segment, we're achieving industry-leading levels of NOI growth by; one, partnering with best-in-class regional operators; and two, as a product of our work repositioning underperforming properties with new operators. Our same-store year-over-year SHOP NOI grew by 49.1% in the second quarter of 2024 compared to the second quarter of 2023, driven by approximately 700 basis points in occupancy gains compared to the second quarter of 2023 and also accelerating RevPOR growth above and beyond ExPOR growth. Furthermore and as a credit to our hands-on asset management approach, we're pleased to report that same-store NOI margins for our SHOP segment expanded by 200 basis points from the prior quarter and exceeded 20% in Q2 2024. Similar to our integrated senior health campuses segment, occupancy in the SHOP segment is trending higher post quarter end with spot same-store occupancy as of July 26, 2024, at 88.1%. At these levels, more options become available to our operating partners to drive investment performance and to support further NOI gains in the second half of 2024 and into 2025 and beyond. The strategy moving forward for the team and our operating group, in addition to delivering occupancy gains will be to further optimize our pricing power where demand dictates and control expenses to deliver further margin expansion from current levels. I continue to believe that partnering with strong operators is the single most important factor driving successful senior housing investments. We are confident that our regional asset management approach during these results could be successfully expanded upon with other growth opportunities when the time is right and appropriate for us to grow externally. With that, I'll hand it over to Brian.

Thanks, Gabe. In the second quarter of 2024, we earned $0.33 per fully diluted share of normalized funds from operations, driven largely by 15.7% same-store net operating income growth across our combined portfolio. We are increasing our full year 2024 NFFO guidance to a range of $1.23 to $1.27 per fully diluted share, representing a $0.04 increase to the midpoint of earnings guidance. This upward revision is primarily due to the increased expectations for NOI growth in 2024 across our combined same-store portfolio of between 12% and 14%. We are also adjusting same-store guidance for our various segments for the full year 2024 as follows. We now expect our integrated senior health campuses segment to grow between 18% and 20%. And in our SHOP segment, we now project 45% to 50% NOI growth in 2024. As Danny mentioned earlier, the pace at which demand increased among our managed care segments is a positive development, prompting the revisions to our total portfolio and segment level NOI guidance for 2024. In my mind and as I've mentioned often, it was never a matter of if we would be able to achieve this level of performance, only a matter of when. And I'm glad that we are getting there faster than we had originally forecasted. Our guidance for outpatient medical and triple net leased segments remains unchanged. To remind everyone, we anticipate flat to slightly declining growth within outpatient medical and 1% to 3% growth within our triple-net leased properties in 2024. We expect stability from our outpatient medical segment where our team is actively managing tenant move-outs with incremental leasing in the back half of the year. More of the anticipated move-outs are expected to occur in the fourth quarter of 2024 but we anticipate healthy new leasing and re-leasing activity through the end of the year to partially offset those occupancy headwinds. Within our triple-net leased segment, we continue to see improving lease coverage levels for our tenants, with total triple-net leased EBITDAR coverage levels ticking up sequentially from 1.25x last quarter to 1.29x in the second quarter of 2024. The most meaningful improvement in segment rent coverage occurred for our skilled nursing and senior housing leased segments, currently at 1.34x and 1.11x EBITDAR coverage, respectively. With respect to full year NFFO guidance changes, the upside is being driven by significant same-store earnings growth in excess of previous expectations as well as some minor nonrecurring income this quarter with an ongoing offset from increased borrowing costs. In the quarter, we received approximately $1.8 million in nonrecurring recoveries from former tenants, resulting in slightly more than $0.01 per share increase to our Q2 2024 and full year earnings. I would not anticipate those amounts to repeat in subsequent quarters. Interest expense remains a headwind to earnings as we anticipate higher interest costs going forward from several factors. Asset sales are taking longer than originally anticipated which means debt paydowns are delayed until later in the year. We financed a few lease buyouts at Trilogy utilizing debt, resulting in lower facility rent expense but higher interest costs, higher variable rate debt costs due to changes to short-term interest rate expectations as determined by the Fed, noncash interest expenses higher related to write-offs of previously unamortized loan fees, loan fees related to extending revolving lines of credit and GAAP above and below market rate debt adjustments. Although these amounts are showing up in earnings, they are noncash charges and do not affect cash flow from operations. Taking a look at our balance sheet, organic internal earnings growth has improved our net debt to annualized adjusted EBITDA ratio by 0.5 turn to 5.9x as of the end of the second quarter in 2024 as compared to 6.4x at the end of Q1 2024. Turning to our capital allocation activity. During Q2 2024, we exercised purchase options on 3 campuses within our integrated senior health campus segment, totaling approximately $46 million. These buildings carried a lease rate of approximately 9.1% and buying them out reduced our facility rent expense, enhanced segment level earnings and importantly, allowed us to gain control of the real estate underlying our operating assets. We are maintaining our disposition proceeds guidance with expectations to sell approximately $50 million of additional noncore properties for the remainder of the year, bringing full year 2024 sales proceeds to approximately $65 million. As previously stated, we continue to expose assets to the market to further recycle capital within our portfolio. We evaluate additional dispositions based on whether or not we are able to attain attractive pricing which in turn supports earnings and NAV accretion and further deleverages the balance sheet or allows for modest external growth. Our approach to capital allocation remains measured and is aimed at maximizing value for all AHR stakeholders. That concludes our prepared remarks. And with that, operator, we are now ready to open the line for questions.

[Operator Instructions] Our first question comes from Joshua Dennerlein from Bank of America.

I just wanted to kind of maybe touch base on Trilogy. It's kind of newer to the public markets. Just kind of how should we kind of think about like the rate growth going forward from just all the different moving pieces? I know like CMS is moving rates and in like the different states. I guess any kind of insight into the go forward if there's any certainty at this point?

Thanks, Josh. This is Danny and thanks for joining us. Good afternoon to you and I'm going to hand it over to Gabe for that one.

Josh, so I think Trilogy, to think about their business, it's basically a mix of senior housing and skilled nursing that boils down to about 55% skilled nursing beds and 45% senior housing beds which is predominantly AL and with a little bit of IL. On the AL/IL senior housing side of the business, I think the rate growth acts very much like the rest of our competitors and the rest of the nation. Trilogy may be a little bit better than both because they're higher occupied already so they've got more pricing power but more important than that, they're kind of the preferred option in the markets that they're in. So we saw on their senior housing side, about 6.5% to 7% year-over-year growth in rate. I think they'll continue to have pricing power there. On the skilled nursing side, it's obviously a mix. And within that skilled nursing component, you've got a certain percentage that's private pay which acts a lot like the private pay on the AL and IL part of the business, although Trilogy outsized growth in rate in that part of their skilled nursing business at 9.3% year-over-year. With Medicare and Medicaid, I think we've seen the reimbursement environment steadily improving. And part of it is catching up to what was really incredible inflation over the last 1.5 years and getting the rates to a spot where it takes into account especially the increases in compensation expenses that we've had. So, we expect that to be -- continue to be positive. Specifically with Medicare, they put out the final rule that said that the national average increase for skilled nursing would be 4.2%. In Trilogy's markets, we expect it to be a little bit better based on reflecting the increase in labor expenses over the last year. On the Medicaid part of the business, I think this might be the most interesting part of the business as far as where rate growth can go because the states that Trilogy operates in are shifting more and more to value-based care models, where if you provide the highest quality of care, you're going to be rewarded for it in terms of an add-on or additional rate. And the things that they look at are things that Trilogy performs really well in, 5-star rating, staffing rating, hospitalization rates in certain conditions like pressure ulcers, things like this. And that's one of the things we really like about partnering with Trilogy. And all of our operators are high-quality operators but Trilogy kind of stands ahead of everyone in providing the highest quality of care. And now the reimbursement environment is really starting to recognize and appreciate that level of care and give the people who are doing it the best a little bit more of an incentive to continue to perform that way.

No, that's good color. Brian, you mentioned asset sales are taking a bit longer than you expected. Is there any kind of color you could provide on like what's driving that delay or...

Yes. Good question. Actually, Stefan is on the front line of that. I'd actually like him to weigh in.

Thanks, Brian. Josh, yes, so in terms of what's delaying deals, I mean, I think it really is a matter of buyers are tending to be a little more careful about their diligence. They want to be -- they want to understand, for example, what's going on, on the CapEx level. So they're just digging in a little bit more on that end. And I think part of that is related to the lenders and what they're expecting as well on their side as far as the underwriting is concerned. So I think a little bit of it is a push down from the lenders. But I also think that in the market today where you've got a very limited amount of supply in terms of assets that are out there, especially on the MOB side or outpatient medical side, I think they are just being a little more careful about what they're buying and what they're paying for. And so I think that's what's delaying really some of the progress in terms of getting deals done.

And Josh, oddly enough, we're not actually seeing a backup in pricing. So it's not as though cap rates are moving from where we were originally thinking we could get deals done. As Stefan described, it's really way more stringent due diligence probably brought on by lenders.

Our next question comes from Austin Wurschmidt from KeyBanc Capital Markets.

So for the integrated health campuses, Gabe, really appreciate all the detail you provided on that segment and some of these levers and opportunities that you highlighted, occupancy, Q-mix and expense management, I think were kind of the primary. What does this all kind of roll up and mean for the margin expansion potential over time? Can you just frame that up for us a little bit?

Yes. So we're very pleased with the direction that we've seen from the margins at Trilogy. We're still below where we were pre-COVID but we're getting closer. Every quarter, there seems to be a pretty good movement. Our expectation or my expectation is that we'll surpass the pre-COVID margins. It's going to take a little bit longer. I think it's -- part of that is because I'm expecting higher occupancies and we're already at higher occupancies than pre-COVID but I expect those to continue ticking up. But we've got a good wind in our backs from a reimbursement perspective. Gabe mentioned Medicaid has been moving up at a very nice clip. October 1, when that new Medicare rate kicks in, that's going to be very, very helpful for Trilogy. So I mean, Trilogy's margin pre-COVID was kind of a 19-ish range and we're not too far off that. I would expect us to surpass that.

Appreciate some of the thoughts there. And then just switching over maybe to the SHOP segment, you've alluded to exploring opportunities to grow that segment at the right time similar to kind of the Oregon deal you did earlier this year. Any update or thought process around the opportunities that lie in front of you either with the existing operator base or new relationships?

Yes. So good question. We've had a couple of opportunities that we've done over the last 1.5 years, mainly because of the meds [ph] position we were in. We took over a portfolio in Texas, very pleased with, or the one in Oregon that you just mentioned. There is one more coming down the pipe which we really are not ready to disclose anything on it. If and when that deal closes, we'll disclose it at that point.

I mean sort of top level, Austin, there's tremendous opportunity in the market. And I think you're seeing some of our peers -- one of our peers are able to take advantage of that. We see those same opportunities. We love the fact that we've got these great regional operator relationships. They're bringing us deals. We are a little bit capital constrained at the present time. We don't want to -- we fought hard to get our leverage where it is down to 5.9x and we're very protective of that. So hopefully, at some point, the stock rerates and we'll be able to grow externally. But for now, we're being extremely selective.

Yes. So we've closed on the deals that we've just discussed. We've been growing within Trilogy. We view Trilogy as our best risk-adjusted return today. So we've been kind of taking our limited capital dollars and really putting it towards Trilogy expansion.

Yes. That makes a lot of sense. But I guess on this one more SHOP opportunity, I mean a, I guess, what are the plans to fund it to the extent that it does materialize? And is this similar to those other opportunities you've highlighted where there's pretty significant NOI growth and occupancy upside?

Yes. So we would be taking it over for the cost of the debt, so there'll be no new dollars going out the door. And we view it as a very opportunistic play with a lot of upside.

Our next question comes from Ronald Kamdem from Morgan Stanley.

Just 2 quick ones. So going back to Trilogy, I think following up on that line of questioning, I think you talked about potentially getting to record margins. Maybe can you talk about where you think the occupancy levels are at that point as well? Could you get to sort of the 90s? And also maybe just a quick update on the potential buyout. Obviously, the numbers have been accelerating, just how you're thinking about sort of the buyout and funding it.

Yes. So Trilogy's occupancy has ticked up very nicely. Right now, the AL/IL and the skilled occupancy are roughly the same. AL has caught up nicely. If we go back 1.5 years, coming out of COVID, the skilled side recovered much faster as we would expect. I would expect that the AL/IL side will probably grow faster at this point. I mean, there is room to grow in skilled as well. But Trilogy skilled model is a short stay. Average stay there is less than 30 days. Hospital discharges are where we get our patients. So there's really -- there is room to grow it but you're not going to take it to 98%. You're always going to want to have beds available for new residents to move in. The AL/IL side, I think that there is room to definitely grow that. I don't see any reason why that wouldn't go well into the 90s. But it's higher margin business, probably faster growing in the long run. As far as the option, we've got a lot of flexibility there. We have well over a year to exercise that option. We've got flexibility as to how we do it, whether it's cash or preferred. There may be an opportunity to do something with common stock. We're obviously eager to exercise that option. We want to own all of Trilogy. We would love to recognize the earnings accretion that would come along with that transaction. That being said, the price is fixed. There does increase January 1 so that is obviously a deadline that we're going to look at as to whether we want to do it before or after that. But the value creation of Trilogy ensures to us under any circumstance regardless of when we close. So it's -- we'd like to close it in an efficient way. And as Brian mentioned, we've gotten our debt multiple down to a level that we're very comfortable with. And we're just -- we don't want to just turn around and raise it back up without an opportunity to lower it again.

Great. That's helpful. And then look, my second question was just on flow through. Maybe you talked about the $0.04 raise in the guidance, $0.01 of that seemed like a nonrecurring. Maybe can you talk about the NOI upside, like how many pennies was that and what the interest cost offset on that was and how we think about flow through going forward?

Yes. I mean, listen, we haven't broken it down to $0.01 for each segment raise or $0.01 for the interest. We are comfortable at the NFFO guidance for the year. the entire range of the guidance. Obviously, the midpoint is $1.25 but we put out the guidance because we're comfortable in that range, at least as of today. We may see things down the road. I mean, heck, the -- there's been a lot of calls for a 50-basis-point decrease in interest rates from the Fed next month. And if that were to happen, then I think interest becomes a little bit less of a headwind. So we are comfortable with the range. We haven't really talked about pennies for each of the individual segment increases. As we get more visibility, as the year wears on, we can refine that guidance even more.

Our next question comes from Michael Carroll from RBC Capital Markets.

Danny, can you talk a little bit about your investment pipeline? I know you mentioned that you're seeing some really good opportunities out there. I mean, with the improvement in the cost of capital that you've seen, specifically in the stock price over the past few months, I mean can AHR get more aggressive deploying capital and growing externally, possibly using new equity to fund some of those investments?

I don't want to get ahead of ourselves. Obviously, now that our lockup has expired, we are able to go back to the market. I'm not saying it's something we're necessarily looking to do this month or next month. Right now, we have so many opportunities -- we do have the third opportunity that I mentioned that hopefully will come to fruition sometime soon. We've got -- we just started 5 new independent living developments within Trilogy. We just announced a new campus for Trilogy in Michigan. There are so many opportunities to grow Trilogy that as long as our capital is limited, we're probably going to focus more there. We may do the one-off deal with some of our regional operating partners. I wouldn't be surprised to see something there. But as far as going out and starting to invest a lot in new acquisitions outside of Trilogy, I think we're going to -- I mean right now, job 1 is to expand Trilogy and buy out the rest of Trilogy. I would say that's probably going to be our primary focus before you start seeing us go along into other acquisitions. Even though the opportunities are there, it kind of -- we see them and we'd love to take advantage of them but we also have to be good stewards of capital.

Investors spoke to us loud and clear during the IPO process of where they wanted to see our leverage. Partly that's because it makes the equity trade better, partly because it will allow us to take advantage of external growth opportunities out in the future once we find things that are going to meet our return requirements. And so to the extent that the stock continues to rerate, the multiple goes up, I think those opportunities become more and more attractive. But we're very cognizant of where our leverage multiple is.

Okay, great. And then I guess with regard to Trilogy, I know they've done some pretty good results over the past several quarters and probably years. I know there has been a few leadership changes -- or not maybe changes but with the promotion of David becoming the President and CFO, I guess, first, congrats to David. And I guess then, second, can you provide some color on that shift, I guess, within their leadership? And what does that open up Trilogy to? I mean, can they expand more aggressively? Or is it just giving more recognition to David for his work and the stuff that he's contributed to Trilogy?

Yes. I wouldn't read too much into that. It's not really a change in leadership. I mean, Leigh Ann has been the CEO for 5, maybe 6 years at this point. She took over for Randy Bufford, the founder, when he retired in 2019. Leigh Ann has been there for 20-some-odd years, she's been a long-time COO. She's not looking to make any changes in her life. David has been the CFO for several years, I don't know, 6, 7 years. Both of them are doing a fantastic job, as you can see by the results. We're big fans of both David and Leigh Ann. I think this is really just an upgraded title for David. He has taken on more responsibilities as CFO, especially on the ancillary side of the -- ancillary business side of the company. So I really don't -- you shouldn't read too much into that adjustment in title.

Our next question comes from Michael Griffin from Citi.

Gabe, I want to go back to your comments just on seasonality within Trilogy and just given where kind of occupancy expectations are there. You called out a lot of the stay on the SNF side, a sort of shorter term rehab stay. So is it fair to assume that occupancy is going to fluctuate in the near term? Or do you still expect kind of the sustained increase to happen over the next few quarters?

It's a good question. And I think the hard part about where we're at right now in this kind of pre-COVID world in senior housing and skilled nursing is that it's really difficult to project how quickly things are going to move. So I think that what the question actually is, is about what could stop growth from happening? And right now, from my seat, there's -- sure, there's a little bit of seasonality in skilled nursing. But like I said, it's probably less than half of what we see in a traditional pre-COVID year, right? So what could really disrupt kind of this long-term run rate we're on, that I think is at least 2 or 3 years, is new supply, obviously. We don't see that coming, especially in skilled nursing, where the number of units in America continues to decline, not increase. And on the AL side of Trilogy's business, we're not seeing any construction starts. It's at historic lows, I think even below where we were during the global financial crisis. So if supply is not picking up, the only other lever there is, is really the demand. And on the skilled side, you see demand kind of go down a little bit with seasonality, I think, mainly driven by the flu. And so that's normal. I don't think it's too concerning at this point that we are seeing a little bit of seasonality in the skilled line of that business because we're seeing accelerating growth in their assisted living part of the business. And by the way, that's part of why we think Trilogy is an attractive platform, because the entire business has a different risk profile when you've got these different drivers of demand by including them all in 1 campus, IL, AL and skilled nursing, right? So it's always been at Trilogy, the AL summer selling season is really positive and the skilled nursing occupancy has some seasonality to it. And the reverse is also true in the winter months where the skilled occupancy picks up and maybe AL drops off a little bit.

Yes. And remember, Trilogy also has the ability to transition wings if demand is up or down for any particular service. If there's a demand for AL memory care, they can convert a wing very easily. If they need additional SNF beds as long as they've got the licenses for it, they can convert into additional SNF beds. So they've got flexibility there based on the demand for the different lines of business.

And then one more point I want to make on this to you is occupancy is not the end-all, be-all for Trilogy NOI growth. you can see how even sequentially in the quarter, Trilogy's optimized Q-mix in order to grow NOI pretty substantially but you're not seeing huge moves in occupancy. And that's by design, right? You can optimize the business in ways that help you to grow the NOI without necessarily pushing occupancy to the limit. And I think you're going to start to see that happen in the SHOP world as well, right? As people focus more on what's a rate that can get me back to a pre-pandemic margin, they may be willing to decelerate the growth in occupancy in exchange for a rate that's more profitable.

Yes. So Trilogy can take more Medicare and less Medicare Advantage. They can take lower acuity Medicare residents where their daily rate may actually be a little bit lower but the margin is much higher just because there's a lower level of care. So there's all kinds of things they can do to move the needle without just simply growing their skilled census.

That's great. I appreciate all the color you guys gave there. And then maybe just some updated thoughts around the dividend. Obviously, the payout ratio looked like it improved about sub 90% this quarter. I know that the CapEx can be kind of lumpy on a quarterly basis. But if I think back to the IPO, I mean the expectation was for about 100% payout ratio for '24. Has anything changed? And could we see that payout ratio on a full year basis kind of come inside of that, maybe into the low to mid-90s?

Yes. I think that's totally possible. If you look at the CapEx spend -- if you isolate Q2, if you look at the CapEx spend and you add back the noncash interest expense, I think our AFFO payout ratio was certainly around 90%. What has changed, frankly, from the original discussion was that occupancy has increased faster than we had anticipated. The mix is very beneficial at Trilogy. Ultimately, there's a lot left to the year. I would classify our earnings growth expectations, the guidance we've given as still somewhat aspirational which is to say that we can't just go on vacation and assume that these numbers are going to show up. We've got work to do to get there. And I think that if they come through the way we're currently projecting, I think there is a chance that the dividend is covered. Now it's not going to be covered at the level that we would like to see it. Obviously, we gave guidance that we want to see a much deeper coverage. But we think that the organic earnings growth that's embedded in the portfolio will get us there possibly in 2025 or probably in 2025. But yes, I think there is a chance we'll be below 100% payout ratio this year.

Our next question comes from John Pawlowski with Green Street.

Just 2 questions from me on the SHOP portfolio. The 3.1% RevPOR growth year-over-year in the quarter, are concessions still weighing down that number? Or is that kind of the clean results we should expect as a reasonable run rate moving forward?

Yes. I think there's still -- there's less concessions, that's for sure. If you go back to the last earnings call, we said that our expectation is we will see RevPOR growth accelerate throughout the year. We've certainly seen it from Q1 to Q2. And I hate to provide forward-looking statements but my expectation is we'll continue to see acceleration throughout the rest of the year.

And that's the benefit of occupancy, where it is. I think at that point, you can be a little bit more strict on concessions and not handing them out. You can certainly push on street rates. And that's the benefit of having occupancy up where it is. If you're trying to build occupancy and raise RevPOR at the same time, it becomes much more difficult. And now that you've got a critical mass of occupancy, you can push on rate.

Okay. And then I want to go back to your CapEx comments. I know there's seasonality in CapEx and it's lumpy but it's up massively year-over-year versus Q2 of '23 in your SHOP portfolio. Can you just let us know how basically -- for how long should we expect an above-trend CapEx figure as you maybe spend some deferred CapEx that you didn't get to during COVID?

And it's a fair question, John. The reality is that we're -- we see seasonality in our CapEx spend which sounds weird but we do have a number of assets that are in cold weather states. And it's very difficult to do a roof replacement or a parking lot resurfacing when there's snow on the ground or snow on the roof. And so the Q2 spend is higher than it was in Q1. But frankly, if you go back and look at the trailing 4 quarters of CapEx, for each of our segments that we've given guidance on, those numbers are almost exactly where we've given guidance. And what I mean by that is the Trilogy CapEx spend, we gave guidance about $900 to $1,000 a bed. It happens to be on a trailing 4-quarter basis, $1,032. So it's right where we had indicated. On the SHOP side, the trailing 4 quarters is about $1,100 a bed and that's precisely where we gave guidance. We thought it's between $1,000 and $1,100. So I would say the CapEx spend is more tied to the fact that -- there's a couple of things. One, we talked about the weather; number two, with operator swap-outs, those were situations where we did not necessarily want to spend with an operator that we were replacing or even potentially a triple-net lease that we were going to convert. So once we got the new operators in and they've been in now for a little while, that's when we want to deploy capital the way they expect or need it to be deployed. So that's a little bit of the step-up. I wouldn't say there's deferred maintenance. CapEx is pretty much right where we're expecting it to be.

Maybe I'm missing something in the disclosure. I'm not following your comments. I'm controlling for seasonality in my comments, so I know the trailing 4 quarter SHOP is lower but $3,500 per unit spend in Q2. I might be missing something but -- and that's versus $830 from Q2 a year ago.

You know what, that's true. It's true and it's not true. I have the benefit of seeing what our numbers were pre-IPO. And so I can tell you, CapEx spend in Q1 was $789 a bed. That's public and publicly disclosed. CapEx spend in Q4 was $793 a bed. CapEx spend is $3,496, you're right, in Q4 but in Q3 2023, it was $200 a bed. Now that's pre-IPO and you don't have the benefit of seeing that. But if you take those 4 quarters and put them together, it's exactly $1,100 a bed.

Yes. And I think the difference between Q2 last year to Q2 this year is we had a lot of operator transitions last year at this time. And when we're doing that, we're not going to be spending a lot on CapEx. We're going to wait to get the new operator in and then kind of see when -- see what needs to be done. So, the way I -- correct if I'm wrong, Brian but I think Q2 2024 is kind of a catch-up quarter where we had kind of low spending in the last few quarters while we were transitioning operators. And we had a lot of spend in Q2. I wouldn't expect that number to repeat itself over and over again going forward.

Yes. It's weather-related, right? And it's also that the new operators are now directing our CapEx spend. But I wouldn't expect it to be -- I wouldn't -- one thing I can guarantee, it's not going to be $3,500 a bed for 2024. It's going to be closer to $1,000 to $1,100 a bed.

There are no further questions. Danny Prosky, I'll turn the call back over to you.

Thanks, Jack. I appreciate it. And everybody on the call, I want to thank you for your time and your interest. It's been a great 6 months since we concluded our IPO. And we're looking forward to continued improvement in our portfolio here at American Healthcare REIT. So have a great rest of the week, everybody and we'll talk to you soon.

The meeting has now concluded. You may now disconnect.