American Healthcare REIT, Inc. (AHR) Earnings Call Transcript & Summary

4:20 p.m. session of Citi's 2024 Global Property CEO Conference. I'm Michael Griffin with Citi Research, and we're pleased to have with us American Healthcare REIT and CEO, Danny Prosky. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com and enter code GPC24 to submit any questions if you do not want to raise your hand. Danny, we'll turn it over to you to introduce AHR and the team, provide any opening remarks, tell the audience the top reasons investors should buy your stock today.

For those of you who haven't, I'll give a quick few minute introduction. I've only been allowed 5 minutes because we want to get right to Q&A. We've been traded for almost a month now. So a lot of you -- some of you who don't know us may not have heard the name, but we're very excited to finally have made it up to -- as a panel presenter here at Citibank. With me is Brian Peay, our Chief Financial Officer; and Gabe Willhite, our Chief Operating Officer. American Healthcare REIT is a midsized health care REIT. We've got about $4 billion in assets based on purchase price. We're a diversified health care REIT. The easiest way to think of us is about 1/3, 1/3, 1/3: about 1/3 medical office buildings, 1/3 assisted living, 1/3 skilled nursing. And it's not -- there's a lot more -- it's not quite that simple. Our biggest investment is a company called Trilogy that provides continuum of care, AL/IL, skilled nursing and memory care. But just as a breakdown, that's the easiest way to think of us. We liked diversified strategy for a couple of reasons. Number one, we like it from an asset management perspective. We like to diversify the payor mix, p-a-y-o-r, meaning what is the source of revenues that our tenants generate at our buildings that they used to pay our rent. So you can imagine a spectrum. We've got assisted living and independent living on one end that are primarily private pay. We've got skilled nursing on the other end. Think it's a lot of government reimbursement. The majority of our skilled nursing was in Trilogy, it's got a much higher quality mix, a lot more reliance on Medicare and private insurance as well as private pay, less Medicaid than you typically see, but it still gets a lot of government reimbursement. In between, you've got medical office buildings that get private pay, government reimbursement as well as a lot of private insurance. And if you look at COVID, for example, we entered COVID with about 1/3 of our portfolio is medical office buildings, and they didn't break during COVID. We actually grew our occupancy in 2020. So the diversified strategy really paid off that year. It's really the other 2/3 of the portfolio that we had to focus on are the long-term care business, as you all know, took a big hit during COVID. We also like it from an acquisitions perspective. It allows us to adjust our acquisition criteria based on the best risk-adjusted returns available in the market at any particular point in time. So if you look at our portfolio, most of our medical office buildings were bought early on in our life cycle. This REIT was actually launched in late 2013. Most of our medical office buildings were acquired in '14, '15 and '16. We saw medical office building cap rates compressed significantly after that. And we kind of moved away from medical office and did start doing more long-term care. So at any particular point, what's going on in the market, we're able to adjust our acquisitions based on whatever is out there, whatever makes the most sense. We've got the expertise at our company to handle the full continuum. Prior REITs that we did years ago that have gone full cycle prior to this REIT, we had a hospital component as well. We stopped doing hospitals about 10 years ago. And then we began life science in the past, although those cap rates have compressed even more. So that's kind of a breakdown of our company. We were in 38 states. We've got a presence in the U.K. We've got a portfolio of caring homes in the U.K. Great operator. But if you look at our portfolio, only about 10% is net leased to single tenants, whether it's AL or skilled nursing. The majority of it is either medical office buildings or managed. Operating more than half of our portfolio is held under the RIDEA structure, that includes Trilogy, plus the rest of our SHOP portfolio. Those 2 segments combined are close to 60% of our NOI. We use a regional operator focus for our SHOP, aside from Trilogy, who's our largest operator by far, who we consider our best operator. We've got 5 other regional operators that we've consolidated into over the last several years that we're very pleased with. And I think if you look at the occupancy and NOI growth in our portfolio in the last 1.5 years, you could see that's paid off, and we expect that to continue. So that's about 5 minutes. Griff, I want to hand it back to you for some questions.

Thank you very much, Danny. So let's start off. You obviously recently became public about a month ago. What do you think the biggest value proposition your portfolio brings to investors?

So with us, I think, there's a pretty easy answer to that. It's really a couple of things. First of all, it's the organic growth. I've been in the space for 32 years. I started out with a company called American Health Properties in the '90s that got bought by Healthpeak. I've never seen health care REITs be able to grow their earnings organically the way we can today. And that is really coming from supply/demand fundamentals within long-term care, whether it's skilled nursing, AL and/or IL. We've got a lot of people turning 80 in the next several years. Baby boomers turned 79 this year, they'll be turning 80 starting next year. We've got a 15-year period of rapid growth in the population above the age of 80 right when we've seen a big reduction in supply. Construction starts have dropped considerably. They slowed in '18, '19 because the lenders tighten the screws on development financing. They just thought there was too much development going on. It dropped precipitously in '20 and '21 because of COVID. In the last 2 years, financing is available, but the interest rates have gone way up, and the proceeds have come way down. And by the way, construction costs have gone up tremendously. So if you look at new starts over the last 6 years, we've fallen back to 2010 levels right when we've seen tremendous growth in new demand. I would say, the other thing is our Trilogy exposure. Trilogy is a unique asset class. Those of you -- some of you who have probably been out to visit Trilogy facilities, once you visit them, you get it. There are newer buildings, purpose-built by Trilogy. Most of what they -- most of what they own and operate, they developed. It's a fast-growing segment for us, very good quality outcomes, very good quality care. Their occupancies are back up to pre-COVID level and growing week in, week out. So I would say, those are the biggest value propositions. Anything you guys want to add?

I think as a new company, we've got a little bit of a prove-it story, and we feel like we can deliver on growth over the first -- really, through 2024 through the RIDEA portfolio. And I think now is a good entry point for people if they want to participate in that growth.

Yes. From a size perspective, I think we're also well positioned. We're big enough to have size and scale, small enough to where we can grow our portfolio and move the needle without doing multibillion-dollar transactions. For us, a couple of 100 million, 300 million a year of acquisitions is sizable.

We just had a question kind of coming on that line of external growth questioning from LiveQA. Do you have plans built in to grow externally? And if so, what yields would you look to achieve? And what do you estimate your cost of capital?

Yes. So we've got really 5 main buckets of growth today at the company. First and foremost is organic growth. We've seen double-digit NOI growth within our operating side of the business. We expect that to continue for the -- for probably a few years as most construction starts pick up at a much faster pace than we expect. But if you look at the rest of our growth opportunities, you've got 3 within Trilogy. A, you've got a purchase option on the part of Trilogy we don't own. We own 76% of Trilogy. The other 24% is owned by a JV partner. And we've signed an option agreement at our option where we can buy them out at a fixed price anytime between now and September 30 of 2025. We've got expansions within Trilogy. Trilogy campuses are built for expansion. Any time there's a wait list or demand for additional services, it's very easy to add on to Trilogy campuses. We also have the ability to add independent living villas on adjacent land. We've done that on numerous campuses. And we've got quite a few more where we have that opportunity. And then we have new campus development in Trilogy. We've typically -- we've developed 28 new campuses over the last 8 years. Our fifth bucket is to grow our operating portfolio, which we see -- we've done a little bit of that. We see a lot of opportunities there. But capital is limited. For us, we really look for 9% yields. It's kind of where we'd like to be in order to do expansion, or excuse me, new growth. That's easily achievable within Trilogy. If you look at the growth opportunities with Trilogy, all of them surpassed that level. As far as expanding our SHOP portfolio, we think we can get there as well. But you probably have to need a little bit more patience. I think a lot of the opportunities we see out there are for good real estate in our markets, where we could bring in our existing operators. But a lot of them are -- either have broken capital structures or are under managed, where you may have to come in at a lower yield, call it, a 6%, 6.5%, and kind of work your way up till 9%. So it's up to a 9% yield. So really, that's kind of what we look at as kind of our minimum return that we're looking for on investments. Today, obviously, organic growth is going to continue. That's going to happen no matter what. But I think we look at the best risk-adjusted returns are still within Trilogy today versus going outside of Trilogy because there's just -- there's good returns and really very little risk associated with it because these are assets that we already own and operate, we already manage, we don't really need to underwrite them.

And maybe just sticking with kind of that internal growth component of Trilogy. What is typically the average length of stay at these facilities? And do many residents at the Trilogy facilities use both the SNF and AL components?

Yes. So the average length of stay within the AL/IL is pretty similar to what you see out there. A couple of 3 years on the AL side, maybe a little bit longer in IL. The skilled length of stay at Trilogy is not -- is less than you typically see in a skilled facility. Trilogy is not the typical 50-year-old skilled nursing facility that relies a lot on long-term Medicaid residents. Trilogy is much more a higher-acuity model. The majority of the residents in Trilogy skilled nursing facilities came from hospitals. They were hospital-discharged patients. The average length of stay is a little bit less than 30 days. They do have some Medicaid patients as well, but they don't really accept new Medicaid residents. The Medicaid residents at Trilogy facilities typically have timed out of Medicare or have run out of money if they were private pay. So they've got the -- they turn over a lot more patients on the skilled side than you'd expect from a typical skilled operator. Most of their marketing comes directly from the hospitals. They actually have employees of Trilogy whose main job is to actually work at the hospital systems to work on those discharges. As far as resident movement, there is a continuum of care to aspect of Trilogy, a little bit like at a CCRC. And by the way, Trilogy facilities are not CCRCs. These are smaller, typically 100 to 125 units, all rental, there are no entrance fees at any Trilogy facilities. There are people who come into IL and maybe move up to AL, and then move into skilled nursing. But you see a lot more residents go the other direction. 72% of Trilogy's AL residents have spent time at a Trilogy skilled nursing bed. About half of those came directly from skilled into AL. So somebody gets discharged from a hospital, they go in -- they had some sort of medical event, they were hospitalized, they now need skilled care, they're in a Trilogy skilled facility for a period of time. Now maybe they need AL or maybe they want IL, they're certainly going to look at a Trilogy facility. They've got -- they're certainly going to look at that as an option. Let's say they get better and go home, and sometime in the future, they either need AL or want IL, where they're going to come back and look at Trilogy as an option as well. Trilogy facilities tend to be newer. They tend to be the nicest facilities in their markets. They've got better quality outcomes, less recidivism, higher nurse staffing ratios, all those things that I think attracts a lot of patients to their facilities. So people move back and forth in both directions from the different levels of care, but you actually see more people move from skilled into AL than vice versa.

And then you talked about occupancies at Trilogy already being at or above pre-pandemic levels. Over the next few years, where do you think occupancy can get to? And how will these occupancy increases help improve margin?

Well, I think my answer would be not just be for our facilities, I think it's for the industry as a whole. I mean, occupancies, whether you look at folks' net lease portfolios, whether you look at operating portfolios, it seems like we're seeing occupancy growth every single quarter for most people out who focus on long-term care. I think that's been the case, at least for the last year, if not for the last 1.5 years. I expect that to continue, certainly for us, and I think for everybody, kind of going back to what I said about supply/demand fundamentals. It's math. We've got -- as people get into their 80s, they need more long-term care. And there's just not a lot of new facilities coming out of the ground. So we've gotten used to kind of mid-80s, high 80s is kind of being stabilized within our space over the last decade. We've seen good demand growth, but very, very strong new supply growth. Now we're seeing much faster demand growth at exactly the time we're seeing a lot less supply growth. So I expect low 90s, mid-90s to kind of be the new norm within assisted living and independent living. I mean skilled nursing, Trilogy could take their skilled occupancy up to mid-90s very quickly. All they have to do is start accepting Medicaid residents, and they would fill up very quickly. But they're always going to want to have some capacity in order to accept those hospital discharges. The daily rate there is substantially higher. That's really what they focus on.

Is there a minimum number of Medicaid patients that Trilogy facilities have to accept? Or if they wanted to, they could have no Medicaid patients?

I don't think there's a minimum. I do know that like in certain facilities, if they accept Medicaid SNF patients, they can't take Medicaid waiver patients versus the living, which doesn't really make any sense. But I don't know if there's a minimum requirement of having at least one, but they're always going to have some. They usually have a wing that's dedicated to Medicaid, that will have double occupancy rooms. And once people time out of Medicare or run out of money, they'll typically move them over to the Medicaid wing.

And then just on rental rate increases for the AL portion, what are you seeing there? And then how are you best able to push pricing given the favorable demand environment you're talking about?

Yes. So going back a few years ago, we saw ExPOR grow much faster than RevPOR. That has flipped the last 2 years. So if you look at 2023, we increased our rates across the board in almost every building, between 8% to 10%. Trilogy did a flat 9.75% across all of its private pay, which is AL/IL and private pay skilled nursing. Now, it's not -- it doesn't mean every single asset had that exact -- it's asset by asset, right? There are some assets that were a little bit above, some assets were a little bit below. But the vast majority of last year were 8% to 10%, this year, it was 6% to 8%. And a lot of that kicked in January 1. Some of it will kick in April 1. Trilogy did 7.5% across the board this year. Remember, if somebody moved in during 2023, and we had a lot of people move in, in 2023, we'll guarantee the rate for 12 months. So somebody who moved in midyear, they won't see a rate increase until their 12-month anniversary. So it's not like everybody went up on January 1, but those are the rate increases that we saw with very little pushback. I think a couple of people wrote letters. But for the most part, people understand that, that's the way the market is moving. They all understand the costs associated with running these things has gone up substantially over the last few years, and we've seen very good RevPOR growth in 2023 and 2024.

And then just maybe on the expense side, you've highlighted the flex-force initiative within Trilogy before. Can you expand on kind of what this initiative is and then how it's helped keep agency labor utilization down?

Yes. So I think we dealt with COVID in '20 and '21, and it was a big factor for those of us in long-term care. But the bigger factor over the last few years has been finding employees, finding staff. And we had multiple facilities. I know for sure, at Trilogy, they've had bedholds because they didn't have the staff. So one of the things we've seen is a lot of agency nursing over the last few years. We dealt a lot with this at our SHOP portfolio. In 2023, for example, we grew revenues -- this is Q3 '22 to Q3 '23. We grew our revenues 3%, but we grew our NOI, was it 50%, roughly, in our SHOP portfolio. The majority of that growth came from eliminating agency nursing. So a big focus for our asset management team in 2023 was to eliminate agency nursing within our SHOP portfolio. The Trilogy portfolio, they actually relied almost none at all on agency nursing. They had a little bit during the height of COVID when a lot of their staff is home sick. But as soon as they saw that it was going to be an issue, they created their own in-house agency. They call it the Trilogy Flex Force. So if you look at our map of Trilogy facilities, they're very heavily concentrated. They've got 125 buildings in Southern Michigan, Indiana, Ohio and Northern Kentucky. And they took about 100, 110 of their nursing staff, and they put them on a Flex Force. And basically, those nurses make, call it, 15%, maybe 20% more than a typical nurse, but they're willing and able to travel outside and work wherever they're needed. And most of them travels by car. And if they need to stay overnight, they can stay at a Trilogy facility. But a lot of them will drive by car and then just drive home. And it really solves the outside agency nursing. It's not just a cost, it's also a cultural thing. Because think about it, if you're a nurse and a regular RN, and a travel nurse comes in to work in your facility, you know that travel nurse is making 2x, maybe 3x as much as you are, and you got to train them. So it's going to take them a day to even be productive. That creates a lot of animosity there. Well, the Trilogy Flex Force nurses will show up. They're part of the Trilogy family. You may already met them because you may have already worked with them in another facility. They show up. Trilogy facilities are purpose-built, they all look more or less the same. They all use the same systems. That Flex Force nurse is able to show up and be productive immediately. And it's been a great model. Trilogy, if you look at their -- the way they're set up, it's a different type of model than a typical RIDEA structure. It is RIDEA, it meets the tax requirements to be -- there is an EIK. However, the management team of Trilogy is incentivized to really focus on bottom line NOI as opposed to top line revenue. And that -- if you look at the alignment there, the senior management team is Trilogy. Trilogy is incentivized. Their incentives, both short term and long term, is very similar to our incentive. Short-term focuses on meeting budgeted targets and NOI targets. The long-term incentive program that they have focuses on NOI growth. It focuses on FFO growth. It focuses on maintaining a certain debt level on their balance sheet and not going above that. And if you look at the bottom line performance that they've shown over the last few years, it really reflects that.

My question. You -- when you went public, I think it was around a 10 cap rate. And you cited like a 6.5 for -- if you wanted to do SHOP today, and I'm not sure what the other assets are. What do you think the right -- what do you think would be reflective of the private market cap rate for your portfolio?

Yes. So I would say that, you're right, we did IPO. It was around a 10 cap. If you look at our cost of debt, let's call it a 7. So overall, we kind of look at our cost of capital, it's maybe a 9, which is kind of why I said, "Hey, 9 is kind of the minimum threshold." Would we consider doing value-add SHOP deals at 6.5, and that we know can work above 9. Maybe. But I would do Trilogy deals first because I can get that 9-plus return day 1 with less risk. As far as the private value, it's a little bit difficult to say, right, because there's been so few private transactions over the last couple of years, and most of those tend to be smaller deals as opposed to larger portfolios. I would say, I mean, we're trading -- we're doing -- we're seeing MOBs trade at kind of low 7s. Maybe, once we get into a higher-quality MOBs, they would be high 6s. But you put them in a portfolio, and that cap rate probably goes up as opposed to down. As far as Trilogy's cap rate, great question. I would say, the biggest issue we had with people valuing our IPO was how to value Trilogy because it's such a unique asset class. Remember, Trilogy is close to half of our NOI. So we would -- I mean, we would look at Trilogy as kind of more of an AL-type cap rate because if you look at the assets, the people who visited Trilogy assets get it. They look like high-quality AL facilities despite the fact that there's a significant portion of it is kind of shorter-term skilled stay. But there are people out there who look at skilled nursing and say, "Well, skilled nursing, it's 10 cap.

Let's say the SHOP is a 6.5 cap.

I've said that if I -- if I were looking at where value-add SHOP would be today and what we would be doing, probably the market today is probably 6.5 on value-add stuff where you can -- I mean, I don't think people are buying stabilized SHOP at 6.5 on a large scale.

Maybe just back to Trilogy real quick. Are there any worries around concentration risk given that Trilogy is about 40% of your NOI, and it's mainly concentrated in 4 states?

It's a great question. We get it a lot. When people look at our -- people look at the concentration trailing, oh, wait a minute, you've got a huge concentration of Trilogy. So I think it's a little bit different. It's different in several ways, actually. It's probably a lot different, not a little bit different. Remember, this is not a lease structure. This is an operating structure. So it's not a situation where you've got a large tenant, let's -- I'll use ManorCare as an example, right? ManorCare paid the rent, they paid the rent, they paid the rent, and 1 month, they didn't pay the rent. So you went from 100% rent collection to 0% rent collection. That's not what you have with Trilogy, right? Trilogy, they could have a down quarter. It's possible. And our NOI for Trilogy would drop, but it's not going to go from 100% to 0%. Trilogy has a lot of diversification. It's diversified geographically. It's diversified by service line, right? It's got a mix of Medicaid, Medicare skilled, private pay skilled, Medicare Advantage, it's got assisted living, it's got independent living. It's a different risk profile than having 1 line of business with 1 operator, where you don't really have control over it. So with Trilogy, we control the Board, we control the investment committee. We're involved day to day. We talk to them. We probably talked to the Trilogy CFO a couple of times a week. Same with our Head of Finance. We have investment committee every 6 weeks. We're involved in all major decisions, whether it's financing, whether it's expansion, whether it's selling an asset. We're not there day-to-day running the facilities, but we're setting up the incentive structure for the management team. For example, if we weren't happy with management of Trilogy, we wouldn't switch out the operator, we'd switch out management. So it's just a different risk profile than what you see if it was a lease structure. I think most people, once they understand it, once they see Trilogy, you get to meet the management team, they understand it's not -- it's a different animal than just a single tenant bond net lease, where you have no control until they default.

What's the breakout of Trilogy between the 3 businesses?

So they're roughly -- if you look at bed count, it's about 55% skilled, about 45% AL and IL. And most of the private pay -- most of the -- it's much more AL than IL. It's probably 80%, 85% AL, 10%, 15% IL, give or take.

And most of the SNF is private pay, you said?

It's mostly -- it's -- they've got a very high-quality mix. It's mostly Medicare or Medicare Advantage private pay. All the Medicaid residents there have timed out of Medicare or run out of money, and they won't kick them out.

And the -- you talked about the -- on the bed count, what about like on NOI, what's the breakout?

So on the bed -- so we don't break out NOI because we don't break out the expenses. We can break out the revenue, but the expenses are shared. If you saw a map of Trilogy or if you saw one of the facilities, everything there is a [ ship ]. So they've got 1 kitchen, they share the dining staff, 2 dining rooms, right, 1 for AL, 1 for SNF, separate entrances, but they share the marketing team, the administrative team, the maintenance team, CapEx, all of that. I mean, even some of the -- RNs can move back and forth on an as-needed. All the staff can move back and forth on an as-needed basis. So it's really -- we could come up with some imaginary breakout on expenses between the 2, but we'd just be -- what's in our mind, there's really no good way to break out expenses. So we don't provide margins separately for Trilogy. We have 1 margin that we give for Trilogy. It's -- Trilogy margin's in the high teens, kind of what you'd expect, right? Skilled -- a good skilled margin, like at Ensign, is maybe 10% to 12%. A good AL margin today is probably 25%, 30%. Trilogy is kind of right in the middle there in the high teens.

And the revenue profile for the SNF is higher than the AL?

Yes, that's kind of lower -- it's much higher, right? It's probably 2.5x over what you see over an AL.

When you were considering going public, did you evaluate just selling the whole business and run a process around that?

We did. Actually, back in 2019, when PDPM kicked in, we knew that was going to be very good for Trilogy, which it was, right? They handle higher quality, they have higher quality outcomes. They handle a higher acuity type resident. The plan at the time was, "Well, PDPM kicks in October 1 of '19, let's see what happens because give it a year, let's see the results from that, we expect them to be good, and maybe we market Trilogy, either just the OpCo or the OpCo and the PropCo." COVID hits, right, so that one was completely off the table. We did do a market check and look at potentially a sale of the entire REIT, not just Trilogy. And with today's interest rates, there really just isn't appetite for a large acquisition like that. So we went ahead and IPO-ed. This doesn't mean we can't sell. It doesn't mean we can't sell Trilogy. We can still do that. In my mind, Trilogy is a fantastic operating business with the movement towards value-based care, which has been great for Trilogy. It would not surprise me if sometime in the future, one of the insurers or one of the health systems would like to buy either all of Trilogy or the OpCo, we'll see. It's a great growth vehicle for us. So I'm not sure we'd love to see it go away, but at the right price, anything is for sale.

But at the time of the IPO, you didn't -- I mean, there are some companies who did put a lot of money out in the space in '23. Was there any dialogue?

We made it known that if anyone said, give us a call. We didn't hire a broker, put a package together and take it out. We did that a couple of years ago when we merged the companies and created American Healthcare REIT.

Great. Thank you.

Maybe just last one on Trilogy before we get to the other aspects of the portfolio. Are there any regulatory concerns related to Trilogy, or maybe, broadly, the assisted living or SNF industries that we should be cognizant of?

Well, I think the biggest regulatory issue that people have been talking about is the potential mandate for higher staffing. Well, why don't you talk about that, Gabe? You'll do a great job kind of talking about that and telling everybody where we are.

Yes. So obviously, the [ buy ] and staffing rules out there, the proposed rules out there, and it's received a lot of criticism from the skilled nursing industry. A lot of people think that staffing is already a problem, and minimum staffing will already -- will stress further that problem. So the good thing about Trilogy or the good news about Trilogy, with respect to the rules, they already handle a lot of post-acute patients. Post-acute patients require higher direct care hours per day than a typical skilled nursing provider provides. So Trilogy is already on the high end on a per patient day direct care hour. We think that Trilogy will probably be within the rule, as far as Trilogy with respect to the rest of the industry. If you look at their 5-star rating around staffing, they're always above the national average, and they're above the average in the states that they operate as well. And so we think they're well positioned to weather that rule change. Whether that rule change actually comes about, I think, is highly speculative at this point. I think most skilled nursing providers that you talk to about it would say that it would be very challenging for them to continue to operate their business without disruption. If we do see that happen, the rule could benefit Trilogy's business in some unexpected ways. If -- if they're on the high end of staffing already and other smaller providers can meet, especially the 24/7 nursing requirement, Trilogy could capture market share. If there is a way to pay for the staffing rule, which I haven't seen proposed or explained yet, because Trilogy is already staffing at that level and already incurring those expenses, you'd expect the higher rate to actually flow through to earnings, and hopefully, in an accretive way.

For the stand-alone SHOP portfolio, what's the upside potential here in terms of occupancy and rental rate growth? And how best do you think you'll be able to capitalize on that upside over the next year?

Yes. So we're -- our portfolio is probably a little bit behind. Not Trilogy. Trilogy is back above pre-COVID levels. But the rest of our SHOP portfolio, we've seen tremendous growth the last few quarters. I think it's a -- a part of that is market, part of that is we've done a lot of work over the last few years, consolidating the regional operators that we really like. And I think we're really starting to see the benefit from that over the last 9 months or so. I think our occupancy today is around 82% in our SHOP portfolio. So we still have a lot of upside. I believe we are more like 85% pre-COVID. So not only are we seeing good RevPOR growth, but we're seeing very strong occupancy growth. I've never seen the growth as consistent as I've seen in the last 6 months. It seems like -- I don't know if, I'd say, every week, our occupancy grows, but then I get a report every week. I think it's been -- I can't remember the last time I've seen a week where the occupancy in our SHOP portfolio did not go up. So we expect that to continue, just like I talked about already, not just for us, but I think for the industry as a whole. There is a tremendous amount of upside for us in our SHOP portfolio.

And then for the stand-alone senior housing, triple-net and SNF portions of the business, how have these been performing? And are there any worries from a rent coverage perspective for any of those [ business ]?

Take that one?

Yes, sure. So keep in mind, it's a very small component of our portfolio. It's probably just a little bit over 10%. We're down to just a handful of operators in total. Ultimately, pretty happy with the group of people that we have. We have in the past switched out operators. We've broken leases and shifted them over to SHOP portfolio. But as it is now, with the, as I say, just a handful of operators, pretty happy. Coverage is improving. And the vast majority, if not all of them, have been -- the last numbers we put out were Q3 numbers based on Q2, and all of those were above 1, with the exception of one that was 0.96, trending positively.

And Brian, maybe sticking with you on the balance sheet. I think you've done a good job managing it, getting the leverage down post-IPO. How do you expect the balance sheet to evolve over turn -- and over time? And when it comes to sourcing capital in the future, be it debt or equity issuances, do any of these look more attractive relative to the other?

Yes. I mean, listen, we fought pretty hard to get the balance sheet to where it is right now. It took a lot of dilution in the IPO, obviously. So we're very protective of that balance sheet. We understand it's going to help the equity trade at its best possible multiple. So we're committed to an investment credit-rated type of a balance sheet. And ultimately, there are tremendous opportunities for external growth that are out there, whether it's Trilogy buying up the portion we don't own, potential for kind of under-managed assets that are in our markets with our existing operators. But we're ultimately going to be very protective of that, and so we're not going to just go out and start buying things and using debt to do it. We have a robust sales process. We've sold over $200 million in the last 5 quarters. And so if we need to fund the growth with continued asset dispositions, then that's something we'll do. But ultimately, committed to a really strong balance sheet.

And to that point, should investors be worried about the dividend just given the elevated payout ratio?

Not at all. I mean there is tremendous organic embedded earnings growth in our portfolio. And even if we wind up maybe a little bit overpaid out this year, the growth next year is going to get us closer to our target, if not get us to our target, which is 80% of AFFO payout ratio.

There are no other investor questions. I can end with my 3 rapid fires. First one, what is the best real estate decision today? Buy, sell, develop, redevelop or pause?

For us, it's easy. It's buy, and it is to purchase options that we have at Trilogy, both for existing campuses that we lease as well as the portion of Trilogy that we do not yet own.

And what do you expect same-store growth for the SHOP industry for 2025 to be?

Boy.

Good?

Good. Yes, I expect it to be good. I think it will be as good as this year because I think you -- do I expect us to grow RevPOR as fast -- as high in 2025 as this year? Maybe not. But I expect occupancy growth to continue. And I think as occupancy grows, the benefit to margin increases, right? The more your occupancy, the more each new resident add to margin. So I think we can do as well, if not better, in '25, as we will in '24.

And lastly, will there be more, fewer or the same number of publicly traded health care REITs a year from now?

So I think it will be the same, but I think there will be more M&A activity. But I think -- I know that there's a few other people running around here in the health care space that would love to IPO. So it's already March, whether that will get done before the end of the year, I'm not sure, but there's going to be more active.

Great. Thank you so much.