American Healthcare REIT, Inc. (AHR) Q3 2024 Earnings Report, Transcript and Summary

Thank you for standing by. My name is Briana, and I will be your conference operator today. At this time, I'd like to welcome everyone to the American Healthcare REIT Third Quarter 2024 Earnings Conference Call. Please note that this call is being recorded. [Operator Instructions]. I will now turn the call over to Alan Peterson, Vice President of Investor Relations and Finance. Please go ahead, sir.

Good morning. Thank you for joining us for American Healthcare REIT's Third Quarter 2024 Earnings Conference Call. With me today are Danny Prosky, President and CEO; Gabe Willhite, Chief Operating Officer; Stefan Oh Chief Investment Officer; and Brian Peay, Chief Financial Officer. On today's call, Danny, Gabe, Stefan and Brian will provide high-level commentary discussing our operational results, financial position and other recent news relating to American Healthcare REIT. Following these remarks, we will conduct a question-and-answer session. 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 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, November 13, 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 financial measures calculated in accordance with GAAP are included in our earnings release, supplemental information package and our filings with the SEC. You can find these documents as well as an 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, and good morning, everyone. We appreciate you joining us today on the call. During the third quarter of 2024, we successfully executed on several key initiatives that have helped to set up American Healthcare REIT for continued growth for both this year and future years. On the operations side, we continue to position the REIT to capture the strong demand for our real estate portfolio. Our operation strategy utilizes a hands-on asset management approach, which continues to drive outsized NOI growth, particularly within our managed segments, comprised of our integrated senior health campuses and our SHOP portfolio. Most notably, on the capital allocation front, we completed the acquisition of the remaining 24% minority interest in Trilogy for cash consideration of approximately $258 million, plus the assumption of pro rata liabilities. As the sole owner of Trilogy, we believe we will be able to better optimize capital allocation and pursue development of purpose-built facilities that serve the growing health care needs in the communities where our properties operate. For example, Trilogy this year, either through our direct investment or our development joint venture, has developed and opened 4 new campuses and completed three expansion projects, which will support earnings growth beyond 2024. We believe that at Trilogy, we will have consistent external growth opportunities every year. Without the complexities of having a partner in our Trilogy investment, we expect to be able to increase our pipeline of growth opportunities and respond appropriately to our cost of capital and return requirements. We are excited to enter this next chapter alongside Trilogy Management Services as our operating partner to deliver high-quality care outcomes to residents and strong performance for AHR stockholders. We completed the acquisition of Trilogy using proceeds from our September follow-on public common stock offering, which raised approximately $471.2 million of gross proceeds and also enabled us to pay down approximately $194 million on our lines of credit, further improving our balance sheet. We expect this enhanced financial position to provide us further flexibility and capacity to pursue external growth. Currently, we see robust opportunity to grow our managed portfolio segments given the strong return profile for investments made at Trilogy and within our SHOP operators. Year-to-date, we've been able to close over $650 million of investments, inclusive of our Trilogy minority interest acquisition, lease buyouts and SHOP acquisitions. And we expect to be able to do more to the extent our cost of capital allows. Stefan will discuss some recent acquisitions we've executed in our SHOP segment and the landscape for future opportunities later in the call. As a result of the strong organic growth in our portfolio and delivering on accretive transactions this quarter, we are once again increasing our same-store NOI growth and normalized funds from operations guidance for the full year 2024. Brian will provide further details on our guidance during his remarks. I'd like to once again take a moment and thank the entire AHR team, our Board of Directors and our operating partners for not just driving execution and performance during the third quarter but also for the continued focus on patient care, which is a primary mission here at AHR. Without them, we would not have been able to complete this transformational quarter for the REIT, and I'm excited to unlock value beyond what we've delivered so far this year. We believe that we are well positioned for sustainable growth, executing on the foundational operating strategies that have supported our strong performance thus far and are further excited to unlock opportunities to grow our portfolio alongside our trusted regional partners. With that, I'll hand it over to Gabe to discuss operational highlights in more detail.

Thanks, Danny. Our operational performance in Q3 reflects the strength of our diversified portfolio and the continued robust demand for health care real estate, and that's especially true in the senior housing and care space. Total portfolio same-store NOI grew by 17% year-over-year in the third quarter compared to the third quarter of last year, with another quarter of very strong performance from our managed portfolio segments, which now accounts for approximately 67% of our cash NOI. In our ISHC or Trilogy segment, we achieved 22.6% year-over-year same-store NOI growth in the third quarter of 2024 compared to the same period in 2023. An approximate 50 basis points increase in occupancy year-over-year in the third quarter, strong rate growth, continued expense controls and a favorable mix, all contributed to truly stellar bottom-line growth. During the quarter and through the strong selling season, our Trilogy campuses saw accelerating occupancy growth within assisted living and memory care settings that outpaced the occupancy growth in our shorter-stay skilled nursing beds. As of quarter end, occupancy was approximately 175 basis points higher within our assisted living and memory care settings versus skilled nursing at Trilogy campuses. The benefits of this should be realized in operations as assisted living and memory care occupancy tends to be higher margin with longer length of stay, providing a solid foundation for sustained NOI growth in the coming year. It's also positive as we head into what's historically been skilled nursing stronger winter season. In our SHOP segment, we achieved 61.8% year-over-year same-store NOI growth in the third quarter of 2024 compared to the same period in 2023. Continued occupancy gains, accelerating RevPOR growth and moderating expense growth contributed to a remarkable growth last quarter. This level of performance comes from all the work we've done over the last few years to curate our regional operators in our SHOP segment. One of the advantages of our relative size is that it has allowed us to be highly selective in our operating partners, making sure we work with groups that we trust and have full faith that we will be able to execute alongside given our hands-on asset management approach. We certainly cannot achieve this level of success without the best operating partners, and I want to thank them for all their efforts in providing the highest quality of care and experience for our residents. All of the positive organic growth momentum we've observed through the first three quarters of 2024 in our managed portfolio has continued into early Q4 with spot same-store occupancy as of November 1, 2024, at Trilogy at 87.6% and at 89.2% in our SHOP segment. Over the next 12 months to 18 months, we anticipate that the demand for long-term care should only continue to grow, resulting in RevPOR growth, outpacing ExPOR growth in our managed portfolio segments. The level of occupancy gains we've achieved so far this year are setting a backdrop for us to drive solid NOI growth and margin expansion next year by focusing on further refining our revenue and expense management at our properties. Now before I turn it over to Stefan, I want to highlight that operational efficiencies have been a key driver of our success, particularly at Trilogy. Now alongside Trilogy, we're exploring various opportunities to continue refining our operating capabilities across our portfolio, where Trilogy and its best-in-class practices can help support our other regional operating partners. This will help build on and level up the current information sharing we facilitate among our operators. We've identified both revenue growth and cost savings initiatives as near-term opportunities where we can leverage Trilogy's scale and expertise as a leading provider of care to help drive operations for the rest of our SHOP portfolio operators. While we're just getting started exploring these opportunities, I'm personally excited about the potential to tap into yet another way to drive performance and ultimately, value for our residents and our shareholders. With that, I'll pass it to Stefan to discuss some of our recent acquisitions and what he's observing in the transaction market today.

Thanks, Gabe. Our investment team remains busy, and we are in the market actively looking for acquisition opportunities to complement our existing portfolio. We intend to remain vigilant in our deployment and respond appropriately to our cost of capital. As we look to grow, we are most optimistic about growing our SHOP segments and expanding our footprint with our stable of strong regional operating partners. In the third quarter, we acquired a portfolio of senior housing assets in the state of Washington for approximately $36.2 million. The portfolio consists of five assisted living and memory care properties. After acquiring the assets, we transitioned the operations to two of our trusted operators, Cogir Senior Living and Compass Senior Living, consolidating operations with two of our operating partners who already have a presence in the region. We underwrote the acquisition to a stabilized high single-digit, low double-digit yield, and initial performance in our first 2 months of owning the assets suggest we will meet that target. Through the relationships we have established with our recent SHOP acquisitions, we were able to unlock additional opportunities such as our most recent acquisition of a SHOP property located in the Atlanta MSA for approximately $7.5 million. The transaction closed after quarter end, and we transitioned operations to Senior Solutions Management Group. Although small, this acquisition exemplifies our ability to successfully source acquisitions of assets with debt maturity challenges through the relationships we've established with lenders and special servicers. After the annual meeting at the end of September, we came away with conviction that there is ample opportunity to grow in today's market for well-capitalized buyers like ourselves. As we look to grow externally, we do not need to pursue large portfolios of SHOP assets that are widely marketed because we believe we have multiple avenues for growth that are more attractive, whether it be with Trilogy, single asset deals or smaller portfolios, off-market opportunities with our regional partners or through the relationships we've strategically built, which unlocks some of our most recent acquisitions. Given all these potential growth avenues, we have built and are adding to our pipeline of potential investments and are actively underwriting acquisition opportunities that meet our quality standards and return requirements. If we execute on these potential investments, we are confident that the assets would complement our portfolio and create value for our stockholders. Lastly, on the disposition front, we are continuously assessing noncore assets for sale, and disposed of an Outpatient Medical building subsequent to quarter end for approximately $19.4 million. I'll now turn it over to Brian to discuss our financial results for the quarter and expectations for the rest of the year.

Thanks, Stefan. In the third quarter, we reported NFFO of $0.36 per diluted share. This performance reflects exceptional operating results and successful transaction activity, especially our acquisition of the 24% interest in Trilogy that we didn't already own and the acquisition of a SHOP portfolio in Washington State. Our results have led us to increase our same-store NOI growth and NFFO guidance for the full year 2024 to reflect year-to-date performance and our expectations for the balance of the year. Importantly, we have been able to deliver on key capital allocation initiatives to grow accretively and bolster the strength of our company and our capital structure. We are increasing total portfolio 2024 same-store NOI growth guidance to 15% to 17%, which is up 300 basis points at the midpoint from our most recent guidance. Additionally, we are increasing our 2024 NFFO per fully diluted share guidance significantly to a range of $1.40 to $1.43. Across our various segments, we are updating full year same-store NOI growth expectations to the following ranges: 21% to 23% same-store NOI growth in our integrated senior health campuses, up from 18% to 20%; 51.5% to 53.5% same-store NOI growth in our SHOP segment, up from the prior range of 45% to 50%; 2% to 4% same-store NOI growth in our Triple-Net Leased properties segment, up from the previous range of 1% to 3%. We are leaving our Outpatient Medical segment same-store NOI growth guidance unchanged as we anticipate a bit more move-out activity in the fourth quarter than new leasing. Our normalized funds from operations guidance is increasing from a previous range of $1.23 to $1.27 per fully diluted share to a range of $1.40 to $1.43 per fully diluted share for the full year 2024, which is an increase of $0.165 at the midpoint. This large increase is attributable to improved property performance the buyout of the remainder of Trilogy that we did not own and lower interest expense due to debt paydowns utilizing follow-on equity proceeds. Our revised guidance does not include any impact from transactions that have not already closed, including possible future acquisitions or dispositions and capital market activity. Through the first three quarters of 2024, our earnings have included approximately $0.04 of NFFO per share benefit that was not previously contemplated at the beginning of the year from miscellaneous other income predominantly coming from insurance reimbursements, and we have visibility to an additional $0.02 per share benefit to our NFFO guidance from items expected to occur in the fourth quarter. Therefore, the revised range of $1.40 to $1.43 NFFO per share includes approximately $0.06 per share benefit from other income. Moving to the balance sheet. Our company's leverage has improved meaningfully since the IPO earlier this year. Our current debt to EBITDA is 5.1 times as of September 30, 2024, which is a near 1.5 times reduction in that ratio from the end of the first quarter of 2024. This reduction is attributable to our strong property performance and debt paydowns from capital markets activity. Moving forward, we remain committed to allocating capital efficiently, and we'll seek to maintain conservative leverage, have less secured debt and less floating rate debt. That concludes our prepared remarks. Operator, with that, we're ready to open up the line for questions.

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

Gabe, could you provide a little more color on the Trilogy platform? And what is it that is unique that can maybe be leveraged across the rest of your operators on the SHOP side? I think that would be interesting to hear.

Sure, Josh, happy to do it. Trilogy has proven in the 8 years that we've owned the company to be the best management team that we've worked with certainly or one of the best in our portfolio at the very least. And we've tried to share best practices across our portfolio for a long time now. This isn't something that's new. We've had operator summits where we bring all of our operators to one location together to share best practices and get better as a company. What is new is that we own 100% of Trilogy now. And as a 100% owner of Trilogy, we started talking to the management team about ways that we could leverage their platform to help support our other regional operators that don't have the size and scale and sophistication maybe at Trilogy. So, some of the things that Trilogy does very well is a really good operator are proprietary, and I'm not going to get into all the nuts and bolts of what they do better than everybody else. But things around revenue management, marketing and targeting the sales, recruitment and retention of employees are areas that Trilogy has outperformed I'd say and things that we could have them help to support and share their strategy with our other operators on.

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

Yes. So, Josh, typically, that's going to be -- you have a loss at a property and you receive the insurance proceeds. That's not real estate revenue, not real estate NOI. That's just one component. It's really a hodgepodge of other non-real estate amounts. And as I said, it's been about $0.04 per share so far through the end of Q3. And we have visibility to maybe another $0.02. It's not all insurance, but that's the biggest line item.

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

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

Yes. So, Austin, this is Danny. And if you recall, either the last call -- I think it was actually the first call of the year back in -- for Q1. At the time, Trilogy's occupancy was running right about even between the AL/IL side and the skilled side, both were rising at a very nice clip. And we said, look, our expectation is that the AI, IL occupancy will surpass the skilled occupancy and it has. We're about 150 bps higher today just as expected. It's really very different, the types of businesses, right? AL and IL, we want to get that occupancy up as high as we possibly can. And of course, we want to focus on RevPOR also, but higher occupancy is better. On the skilled side, Trilogy's model is a short stay, higher acuity type model. The vast majority of their admissions come directly from the hospital. And of course, it's also a huge feeder into the AL/IL side of the business, right? Those residents come in, they stay for a few weeks. Typically, on average, they may go home. Oftentimes, they go into AL or IL. And even if they go home, very often they'll end up coming back to Trilogy AL or IL sometime in the future. So, our goal -- the goal isn't necessarily to be 98% on the skilled side. You always want beds available to admit from the hospitals. You don't want to be situations where the hospitals want to admit patients and you don't have room for them. Trilogy wanted to push occupancy up well into the 90s, they could do so very easily on the skilled side. They could just fill them up with Medicaid beds, but that's not the goal. The goal is to keep occupancy high. We're very happy in the high 80s, low 90s. But to really focus on the mix, higher mix, more Medicare, more private pay, things of that nature. Even with Medicare Advantage, which is a growing part of the Trilogy business line, as you can imagine, they're very selective of Medicare Advantage. If they can't get specific rates from being insurers, they won't sign a contract. They may accept Medicare Advantage patients from those insurers, but each one is going to have to be negotiated at a higher rate than what the original contract offer was. So -- and fortunately, we're in a position at Trilogy where we can be selective. From a Medicare Advantage perspective, most of these really need to work with Trilogy. Trilogy is the dominant provider. There's a high quality, better outcome provider, which I think we're seeing is more and more important today. If they want to maintain those Star ratings, meaning the advantaged providers they need to partner with high-quality providers. But really, the goal there isn't necessarily to maximize occupancy. It's to maximize NOI.

Yes, that makes a lot of sense, a lot to chew on. And then -- and you also highlighted, Danny, the improvement in your cost of capital, lower levered balance sheet. And I guess when you look at the opportunities in front of you, can you differentiate, I guess, between sort of the maybe targeted annual investment in some of these Trilogy opportunities that you may be able to fund with free cash flow versus what the pipeline of external investment opportunities looks like, presumably more towards that the SHOP segment that you and Stefan discussed?

Sure. So clearly, our cost of capital has improved tremendously this year to the point where external acquisitions are much more accretive today than they were, call it, 6 months ago. Now we were very -- we grew a lot this year, right? We did over $650 million of acquisitions, and now $500 million of that, of course, was buying out Trilogy. But the Washington portfolio, the Oregon portfolio, the small deal we did in Atlanta, the nice thing about all of those is none of those were competitive, right? We were the only -- those were all our deals, right? Trilogy, obviously, was our deal. Washington and Oregon, we were able to close on those because we were the lender. And even the one in Atlanta, that was the relationship we had with the receiver that we worked with on our Washington portfolio. I think you'd expect this -- and by the way, that doesn't even include the developments that came out of the ground this year with Trilogy, right? We opened up four new campuses, several expansions. So, our growth is really way ahead of $650 million. There's still a lot of growth opportunities at Trilogy. We've talked about anywhere from $100 million to $200 million a year of annual development within Trilogy, and that will be a mix of new campuses, villas and expansions, and we expect that to continue. We do have nine properties at Trilogy that we either leased or we do not own 100% of. If you recall, earlier this year, we bought out three assets at about a 9.1% cap on our rent. We don't have options on the remaining four that are leased, but we think we have the inside track to buy those at similar pricing. The other five, we own under a joint venture structure, it's 50-50. We have purchase options on those. Those options are designed to be bought out upon stabilization. There may be an opportunity for us to buy those out earlier. So aside from the -- for the development that we expect to see year-in, year-out at Trilogy of, call it, $100 million to $200 million, we still have another nine assets that we have the ability to buy that we do not yet own. And then I think you're going to see us do more outside external growth next year than we did this year, mainly because of our cost of capital. And we've already started to accelerate that pipeline. I think you'll see more news to come next year on that.

And in that regard, I mean, we've been very clear. We are targeting SHOP assets. We think that that's the best risk-adjusted return today. I think what you're going to see -- our approach is going to be not to just get from brokerages and get into bidding wars. I think we can be much more targeted than that. That's one of the benefits of being the size that we are. We've got boots on the ground with respect to our regional operators. They're helping us find transactions, which is terrific. They're in those markets. They understand the assets, they understand the demographics. And then as well as that, we've got existing relationships with special servicers and lenders on deals that might be a little bit underwater on their financing and being a well-capitalized buyer like we are, it is a tremendous competitive advantage. We're shying away from bidding wars, and we're being particularly disciplined about our underwriting on these assets.

Our next question comes from the line of Michael Carroll with RBC. Please go ahead.

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

Yes. So, I'd say a few things on that. So clearly, our RevPOR growth has exceeded our ExPOR growth, which is what we'd expect, and we think that will continue. So, from an expense growth perspective, we seem to be back to kind of where we were pre-COVID. Typical wage growth in the 3% to 3.5% range, which was the biggest pressure point on expense growth over the last few years. I think on ExPOR, because we're -- our as occupancy gets higher, -- you've got -- you spread that over a greater number of occupied units. So that also kind of keeps your ExPOR growth lower because you're spreading out your fixed costs over more units. We expect that RevPOR growth will continue to exceed ExPOR growth going forward. We're very bullish on just the supply-demand fundamentals, and we think occupancies will continue to move up, and we'll have better ability to raise rates. We mentioned earlier this year that we expect our ExPOR growth to increase each quarter and it has. As far as inflation coming back, clearly...

I'm sorry, I think you meant RevPOR.

I'm sorry.

You said ExPOR.

I'm sorry, yes, RevPOR. Pardon me, yes. So, we said that RevPOR growth would accelerate throughout the 1.5 years. It's gone up every quarter. And it's easier, of course, to increase your RevPOR as your occupancies grow, which has happened, and we think will continue to happen. That being said, if inflation kicks in, yes, I would imagine our expenses would grow faster than they are today. I think that's probably the likely outcome, but I think we'd probably more than make it up on revenue.

Okay. And then Danny, how are you viewing the labor environment? I mean, how difficult to define good employees, I guess, versus a few years ago? And if like the new administration starts to have tighter immigration policies, does that negatively impact your ability to find employees or your operators to find employees? Is that a potential concern? And where are we at today right now as of that?

Yes. Well, I'd say employment has been and continues to be the biggest pressure point, I would say, on this business. I think looking at Trilogy is a great example. Their tenant -- their employee retention today is back to where it was pre-COVID. Right after COVID, of course, employee retention dropped, as you can imagine. But we're back up to where we were before, which is kind of industry-leading employment retention. So, it's always -- there's always pressure on the employee side. If you're able to attract and retain employees, that's probably the most important part of the business. I would say that if we start limiting the number of employees in the country, that's probably not a good thing for our business, but it's really hard to say.

And Danny, I'd add to that, that we see that as a risk regardless of what the immigration policy is as a pressure point just because we feel like the demand is coming and you need to hire more people to meet this demand. So, we're trying to get out in front of it, Mike, by having training programs like Trilogy does with all of our operators where the training offers people a path to a longer career and improves employee engagement, and employee engagement drives retention, and all of those things impact the resident experience in the building. So, it creates the flywheel of success and really starts with the employees. So, investing in the employee experience, Trilogy does probably better than anyone. And utilizing to my earlier point and earlier comment, the strategies that have really worked for Trilogy throughout our portfolio is a way I think that we can drive out performance.

Yes. their CNA trading program has been a huge success.

[Operator Instructions]. Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Please go ahead.

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

Yes. So, our expectation is it will continue to trend up. I mean, we track this weekly. And occasionally, we have a weaker occupancy doesn't tick up, and more often than not, it goes up. Now of course, we just got through the summer season. We'll see what happens over the winter. We're very bullish on the space in general because we see the growth in demand, but we don't see much growth in supply. I don't want to give a target. I just think it's going to trend up. I expect it'll be in the 90s. Is it going to be early next year, late next year? I'm not quite sure, but I expect it will continue to trend up. As far as the incremental margin, it varies on all kinds of things, right? First of all, the line of business. Clearly, on IL, it's a higher increment than it is on AL and on scale. We generally look at 40% to 80% depending on the line of business. IL is probably even higher if you're fully leased. And as you get into higher and higher occupancies, at some point, your employment is pretty much at full for each building and then your margins get even better. But we usually look at 40% to 80% depending on the line of business.

And Ron, keep in mind that occupancy growth isn't the only lever to drive NOI growth here, right? And you see that Trilogy is a great example this quarter because they had 50 basis points year-over-year, occupancy growth of 22% plus NOI growth. It's because you're optimizing for other things, right? You can charge better rates, you can stop paying referral fees to referral sources, you can stop doing move-in discounts. There are a lot of different levers to maximize the NOI that I think you need to focus on the bigger picture, not just occupancy growth because as we ratchet up occupancy to get to those higher levels, you're managing a lot of different things at that point to drive NOI.

Got it. Makes total sense. And then just switching gears to sort of the external growth. And I think part of it, I'm just curious about how much more noncore sales you have to fund that. But also, just in terms of just operator relationships, types of deals that you're looking at, we'd love to hear a little bit more color how you guys are thinking about that?

Yes. So, if you go back to last year, we were doing some noncore sales really to fund growth. Today, I don't think we're doing it to fund growth. I think we're doing it to improve our portfolio. We've been selling off Outpatient Medical buildings for the last couple of years. If you recall, a couple of years ago, we were about 35% of our NOI was Outpatient Medical. Today, it's 20 and dropping. I would expect that trend to continue. I think you'll see more announcements next year about us selling off more of our Outpatient Medical buildings. I don't think we're doing that now in order to fund external growth, although clearly, we are, right? If we're selling an Outpatient Medical building at a 7 cap, reinvesting it at a 7 cap or even higher in a SHOP portfolio, well, that's going to have more growth in that Outpatient Medical building more than likely. So yes, we'll turn around and reinvest in external growth. But I think our external growth is going to be higher than our dispositions going forward.

And as far as the assets that our regional operators are sourcing for us, I think if you look at our portfolio, you recognize that we're maybe a little bit higher acuity than some of our peers. So, a little bit less IL, a little bit more AL. And as a result, the assets that our regional operators are looking at are really right in line with what they're operating for us. So, you're going to see us adding to our AL portfolio, we like the IL business. We want to make sure we can be competitive as far as returns go on that. But generally speaking, they are in the markets, and they're looking for assets that look a lot like what they are already operating for us.

I think the advantage for us when using our regional operators is, obviously, we've got a trusted relationship with them. We know what to expect. And they know what we're looking for. And this isn't just a partnership where we're acquiring assets and then bringing them in at the point where we close, we're partnering with them upfront, going through the underwriting with them, getting understanding of that market with them. So, we're really going hand-in-hand with our operators through the whole process.

Our next question comes from the line of Michael Griffin with Citi. Please go ahead.

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

Well, listen, I think you mentioned it. If you're thinking about real estate NOI excludes that $0.02 of miscellaneous income. I think you've got those numbers right. The reality is that there is seasonality. And it's showing up more today than it has in the past because in the recent past, because in the past, everything was just going up. And those increases in occupancies were eclipsing the seasonality that's embedded in the long-term care side of the business. I would say 39.5%, I certainly wouldn't just chuck that in and say that's going to be Q1's number. But as you said, we're -- you're not asking for '25 guidance, and I'm not giving '25 guidance.

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

Yes. I think the acquisitions you've seen, especially the Washington, Oregon portfolio. These were deals where we had the inside track because we were participants in the mezz debt on some Fannie -- or I'm sorry, some Freddie debt. So that gave us certainly an advantage there. The Atlanta deal, that was another case where because of our relationship with the special servicer, we had an inside track there as well. And that's -- I mean we've been trying to develop those relationships, and we think that we will continue to see transactions from that side of it. But I don't -- I wouldn't necessarily say we're going to see a glut of these types of transactions. There are certainly deals out there where the lenders -- I'm sorry, the borrowers in a position where they need to do something and the lenders are going along with it. But there are also a lot of cases where I think we'll see lenders and borrower’s kind of holding on because we are obviously seeing performance improve across the board throughout the industry. So as far as where we think we're going to be seeing a lot of deals, certainly, we'll be obviously talking to brokers and looking at the broker deals. But we're also going to be focusing a lot on the off-market deals, which is going to be deals that our operators might see because of where they're focused and maybe the relationships they have we could be also looking at deals that our own operators might own that they want to sell. So, I mean, we have a lot of different avenues here that we can go to. And it's not necessarily going to be portfolio deals that are out there being broadly marketed. We're really going to be focused on the rifle shot, not the shotgun approach when looking at new transactions.

Yes, I think that's absolutely right, Stefan. I think that these are just opportunities that we have been able to exploit currently. I think if you fast forward out a year or 2, I don't know that every one of the deals that we're going to get is going to come through special servicing and alike. I think as I say, we have an opportunity to source leads for acquisitions from our operators and from our special servicing relationships. Ultimately, we will continue to look at deals that come through the brokers. And as to the second part of your question about the financing market, the reality is it's not -- it's still a little bit gummed up. It's not fully functioning financing markets out there. But that's okay. Frankly, we are not really looking for additional secured indebtedness. We're not really looking for project-specific indebtedness. So, we can live with that. And then just to kind of dovetail your question with some of the questions earlier, to give you the hierarchy of our sources of capital, pretty clearly the cheapest source of capital that we have is internally generated retained earnings, right? So, dollars that we've earned that were over and above the amount of dividend that we paid out, that's the cheapest source of financing, then the disposition front because we are being very disciplined about sales prices and cap rates on going out deals on dispositions. And then you're looking at that and now it's kind of a tossup. That's not super readily available. And what it is coming out at is a little bit expensive our equity, we do understand and believe that there's got to be growth in our earnings. So, cost of equity is not just a simplistic, certainly not our dividend yield, I can tell you that much. But ultimately, that's sort of the hierarchy. And it's good that we're not -- we don't really need a project-specific secured financing today because that market is not functioning fully.

And actually, just to go back to your question about the pipeline. We -- in the past 2 months to 3 months, I mean, obviously, things have dramatically improved for us at the company. So, we have taken much quicker action in terms of how we are looking at deals. And in just that short period of time, we've looked at well over $1 billion of potential transactions. I'd say about $800 million of that is in the SHOP side of it. So, there's a lot out there for us to look at, and I think there are going to be a lot of opportunities for us to do new things.

Our next question comes as a follow-up from Austin Wurschmidt with KeyBanc Capital Markets.

Just piggybacking a little bit on what you were talking about hierarchy in terms of attractiveness of funding options. Earlier this year, you were kind of focused on wanting to over-equitize deals and continue to drive down leverage. You've been able to do that sooner than expected. I guess, how should we think about sort of your plans to fund acquisitions that do come your way from a mix perspective of debt and equity?

Yes. So, as you're well aware, we did a follow-on offering a little under 2 months ago. We have a 60-day lockup that expires next week. Probably more to come after that.

Yes. Listen, I think we've been very clear with the market that we're comfortable with debt to EBITDA in the 5.5 to 6.5 range. Through organic earnings growth and some additional proceeds from the follow-on offering, we were able to get that down to 5.1 times at the end of Q3. My guess is with the continued organic earnings growth, that number goes lower and lower, which is terrific. It sounds like we're going to run out and spend that money as fast as we can to get it back up into the mid-5s to mid-6s. We're quite happy where we are today. But if ultimately, the stock price continues to perform and we're able to issue equity in the most non-dilutive way possible, that would be an attractive source.

We have no further questions at this time. I will now turn the call back to Danny for any closing remarks.

Thank you very much, operator. We appreciate your help on this. And to everybody on the call, thanks again for spending some time with us today. Looking forward to seeing a lot of you next week at NAREIT and looking forward to more of these calls. We are -- like I said, we are very excited about the next few years in this business. So, have a great rest of the week, everybody, and we'll see you next week.

This concludes today's conference call. Thank you all for your participation. You may now disconnect.