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

Bergey from Citi Research. Pleased to have with us American Healthcare REIT. This session is for Citi clients only and disclosures have been made available at the corporate access desk. [Operator Instructions] Brian, I'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reason and investors should buy your stock today, and then we'll get into Q&A.

Thanks, Nick. Really appreciate being here. It's a great conference. So with me is Gabe Willhite, our Chief Operating Officer; and Alan Peterson, our VP of Investor Relations. So I think the reality is that we are in a great segment of the real estate population. So supply and demand fundamentals are terrific in our space in the senior housing long-term care. I think that based on that fact, our organic earnings growth has been terrific, and that has allowed us and afforded us a wonderful cost of capital, which is allowing us to grow externally as well. So I think if you look at the midpoint of our guidance that we just released on Thursday and Friday of last week, we're talking about nearly 18% NFFO per share growth, which is significant.

And so top reasons to buy stock today seem to be good fundamentals, good cost of capital, external growth.

Yes. Terrific fundamentals and quite frankly, very high per share earnings growth. And by the way, we're delivering that per share earnings growth while also continuing to delever. So a really safe balance sheet at 3.4x net debt to EBITDA.

To think about that growth algorithm internally driven obviously by the fundamentals that you're seeing, externally driven based off of kind of the acquisition opportunities as well as kind of your cost of capital that makes it that accretive? Is there any reason to think that the current growth rate, particularly given kind of where leverage is now could not continue for the near and medium term?

Yes. I mean I think that the fundamentals in our sector, as I described, are spectacular. And I think that you're going to see -- I mean, unless every single day, 10,000 people turn 80 years old. And 80-year-olds are definitely in need of exactly our kind of service that we are providing. We tend to lean into the acuity. Some of our peers are far more independent living. We skew more towards assisted living and skilled nursing. And so people are in our buildings because they need to be in our buildings, not because they chose to not because they decided to sell their house and needed to move to something else. So yes, and as far as supply goes, you're really seeing very little new construction. I think the numbers out today are less than 1% of the total stock is under construction today. So with the supply and demand, yes, I think you're going to see a good long period of sustained growth in our segment and feeling very good about long-term fundamentals. I think that last year, we grew our occupancy by 270 to 280 basis points in our RIDEA segments. I don't know if we're going to grow by another 280 basis points this year. But I do know that the average age of people moving into an assisted living facility is between 75 and 85 and the oldest baby boomers this year are turning 80. So we're right in the middle of a period of sustained growth and demand.

And one of the questions we've been getting from investors has just been on the topic of MA and the 0% kind of projection. Could you just remind us how you think about that in the context of how those contracts were kind of on a state-by-state level and how you see those as really an opportunity to kind of drive revenue growth for the company?

Sure. Great question, Seth. So what we're really talking about is in our Trilogy segment. Trilogy is about half skilled nursing business. Within that skilled nursing business, I think the mistake that people often make is they ascribe a kind of inflationary rate increase to that business and think that it's somehow going to cap the NOI growth because you're relying on government reimbursement sources. So a couple of things that they're missing. One of their business that's skilled nursing, about 20% of that is private pay skilled nursing that rate is going to be pushed in the same way that a private rate in AL and IL would be pushed. So they've got pricing power there. And secondly, on the Q mix, the mix of what Seth is talking about between Medicare, Medicare Advantage, Medicaid, they have -- they've got a new thing going on right now. The Medicare Advantage plans, maybe 18 months ago started having issues with their 5-star ratings. And their 5-star ratings are really triggered off of customer satisfaction type scores and access to the best quality operators. Trilogy is one of the highest quality operators in the space. They have a CMS rating of 4 stars, no other large provider has a 4-star rating across their portfolio. They have quality measure rating above 4.8. I think I'd put that up against anybody as well. So the Med Advantage plans are realizing that they're a very high-quality operator that they need to be partnered with. And Trilogy is going through and finding who the best partners are for them from a Med Advantage plan side, and a lot of that is driven based on what the rate is that they're willing to pay them. So within Trilogy's Med Advantage mix, they're partnering with the plans that are going to give them the highest reimbursement so that they can provide the level of care that their residents are used to and that people in the post-acute setting really value. As you get more and more occupied, you can be even more and more selective with the plans that you're partnering with, and that's how they've been able to deliver in their Med Advantage business over 8.5% growth year-over-year on the rate side because they're managing which plans they're partnering with. That trend, I can't tell you it's going to be 8.5% again in 2026. But the main drivers of that trend are still intact. Med Advantage plans still want to partner with the highest quality operator. Trilogy is still hyper focused on optimizing those partnerships. And as you get more and more occupied, you have more power to do it.

And then with that kind of growing occupancy, how do you think overall kind of the sources of payment between Medicare and Medicare Advantage, Medicaid, private pay -- how is that an opportunity to drive kind of revenue on that side, just stepping out of just the Medicare Advantage side, but looking at it overall and driving the revenue mix there?

That's another great point, even assuming that rates just grew inflationary, you can still get rate growth on a per patient day basis that's better than inflation rate by changing the mix of residents that you're bringing into your building, meaning instead of having a high percentage of Medicaid residents that are paying the lowest reimbursement rate, you are getting more and more post-acute admissions in bringing in people that are on Medicare and Medicare Advantage, and that's pushing your overall daily rate higher because those are higher reimbursement sources. That's going to probably continue to be the trend. I think over the last year, we saw maybe a 2% decrease in the amount of resident days that are in the Medicaid setting that trends should continue as there are more post-acute admissions coming into Trilogy.

And then one of the other topics that we kind of discussed with investors is just thinking about Trilogy so can you just kind of explain why it's not a SNF operator within a RIDEA structure and what makes that unique?

Sure. So we get that question a lot. SNF RIDEA who would do that, who would be that crazy to do that. Our competitors, I think, bring it up sometimes. And to be clear, we are not a SNF RIDEA company. We're a Trilogy RIDEA company. The integrated campus is much different than your typical stand-alone SNF that relies heavily on Medicaid that relies heavily on government reimbursement. So within Trilogy, you have approximately half the beds in any given building, which could be 100 to 120 unit buildings. About half our skilled nursing, about half are AL memory care, independent living. That continuum of care on the campus allows them to do a lot of things that other people can't do. One, you have post-acute admissions in the skilled nursing side that are fueling the occupancy on the assisted living side. So about 40% of the move-ins in the assisted living business at Trilogy are coming directly from the post-acute business. If we had that set up across our entire portfolio where you had the dominant skilled provider post-acute provider, giving you 100% of the referrals to your AL. Our occupancy in our AL business would be measurably higher. That synergy works the other way as well as people age from independent living, they start to utilize assisted living. And if you need even more care than assisted living, you'll be in a Trilogy skilled nursing bed. The other thing that it does is just structurally, being able to run a 50-unit stand-alone skilled nursing business or a 50-unit stand-alone assisted living facility is going to be very difficult because there's just too many fixed costs. If you have -- if you try to go out and develop a 50-unit SNF, I don't even know if you can do it profitably. If you do that with 120 units because you have a mix of both, you have access to other markets that other people wouldn't be able to enter and if you're providing great quality of care in all those different acuity settings, you're getting the benefit of it as people move across the continuum.

I think it's important to think about the history and how we got where we are. Trilogy was started 25 years ago by a man named Randy Bufford. Randy was Danny Prosky, our CEO, had a long-standing relationship with Randy Bufford, he knew him for decades. Randy decided that he wanted to build a new and different kind of skilled nursing facility so if anybody here has been to a skilled nursing facility, it's easy to understand that you might think negatively about that. Most skilled nursing facilities are probably a minimum of 30 years old. There's probably a smell associated with them. And the residents tend to stay for a long, long time, and the reimbursement rate that's most prevalent within the building is most likely Medicaid. The reality is that Randy looked at that model and said, "I want to change this." What I want to do is I want to appeal and attract post-acute stay so somebody who has a fall, somebody who had a surgery and they can't go home because they can't get better at home. They just need a short-term stay in a place where there are nurses, where there is therapy, where they can get their meds prescribed and that they can get better. So the average length of stay is between 30 and 35 days in the skilled nursing side. Initially, he started out with just skilled nursing beds. And then he realized that if a resident was ready to leave skilled nursing, but not able to go home, he was losing those referrals to an assisted living operator down the street. So I said, "Well, I should probably bolt-on assisted living here, and he did that." And now we have a true continuum of care. We have independent living beds, we have assisted living beds. We have memory care and we have skilled nursing. And the truth is, yes, it can be a continuum of care where somebody comes in initially into the independent living and then eventually, they go to the assisted and eventually, they go to the skilled. But more often than not, as Gabe described, it kind of back -- it kind of ping-pongs back and forth. So we'll get a resonating in from a fall from a surgery, goes into skilled, doesn't go home, moves into the assistant. They live in the assisted for several years. They need another procedure. They go to the hospital, they get the procedure done. They're still paying for their assisted living bed. When they come out of the hospital, they move into the skilled nursing wing to get better because the nursing care is there for them. So it's really a wonderful combination. And quite frankly, probably and Gabe says this a lot, if you were going to reimagine care, this is how you would do it. You would have it within 1 facility. And so it's how we got where we are. And Trilogy is -- the vast majority of the assets that Trilogy runs were purpose-built, which means they are newer, nicer, average age is 10 to 11 years old. So you're not talking about the old and kind of smelly skilled nursing.

Maybe 2 final points on that because this is pretty important. Trilogy, it's 60% of our portfolio in a lot of ways we go as Trilogy goes. I think they have the most durable competitive advantage in our entire portfolio. To be able to compete with Trilogy in the markets that they have is going to be very challenging for a lot of different people for a lot of the reasons that we just described that are structural and has to do with the physical plan that they've got an advantage on over everybody else on. But two, and I think the most maybe underappreciated part of the entire structure is that we don't have a typical management contract with Trilogy that pays a 5% fee on revenue. That concept, which we have incentives throughout our portfolio with our other shop operators to address that issue. But none are even close to the alignment that we have at Trilogy that's total bottom line aligned. So their management contract pays a below market fee on revenue, and it's heavily incentive laden with a 3-year LTIP that's based on real EBITDA growth targets that we set. So that brings alignment from just the top line revenue, which can be NOI producing but not necessarily if you bring in a bunch of agency to grow your revenue that is not helpful for NOI. It brings it all the way down to the bottom line. So you're fully aligned on NOI. And it's also paid in AHR stock. We were the first company, I think, in this space to adopt a management company incentive program where we issue them stock. And the real key to that is it allows them to participate and create alignment and participate in the value creation coming from Trilogy but it also gives them a real financial incentive to help support the other operators in our shop segment. So not all of those guys are as big as Trilogy and sophisticated as Trilogy and have all the resources Trilogy has. By design, we want regional operators that are close to the assets that they manage for us. What you give up when you find those regional operators to sometimes scale and resources, if we can augment those operators with Trilogy scale and resources, we can get the best of both worlds and with our alignment and the contracts we have with Trilogy, we've created the right financial incentives to drive that.

And then maybe on that point of the regional operators, how do you think about how to select new operators to partner with, kind of what goes into your criteria, what goes into your criteria for selecting asset acquisitions beyond just kind of the yield. Is it any features within location or the building product type that you kind of look for. And then how -- what have you learned from operating Trilogy that can help your regional partners that you select kind of optimize their productivity.

Maybe I'll start. So listen, we traditionally select the operator before we select the real estate. We have a painstaking process of underwriting the operators. We are up to 9 operators in our portfolio. We much prefer the regional operators. We think that they bring a certain level of expertise and certainly, you can concentrate within their markets, which allows them to do a better job of marketing, sharing best practices. We will take sometimes years to underwrite a new operator. Last year, we added 2. This year, we may add 1 more. I don't think you're going to see us at 20 operators anytime soon, given the fact that we're at 9 today. We spend a lot of time getting to know them. We will mystery shop their buildings. We'll go in, we'll see what they look like, how nice they are, how occupied they are. We will track their performance. We will look at their financials. We will get to know the quality of care, their resident satisfaction and their employee satisfaction, which we think are 2 of the biggest drivers for success for an operator. And ultimately, it takes us quite a while before we're willing to add another operator. The reality is, and this speaks to the acquisition side. As I say, we find the operator before we find the real estate. So we don't go out and find a building and then look around for the operator we want to manage it. We have the operator in tow. In some cases, it's quite exciting. They will bring us buildings. So they may have another capital partner that wants to exit. We have a working relationship with this operator and they'll say, listen, we know that this building is going to sell. If you give a fair price to the existing owner, then you probably can buy this and we can stay on as the operator, which is terrific because now we're talking about off-market deals. Other times, we will, again, have the operator. We find a building that is in their market. We're working with them on other properties. We will let them -- we will have them tour that building with us. We can get really -- we can sharpen our pencils on the underwriting or the pro formas of that building with the operator in tow, as you can imagine. Sometimes they'll say, listen, we like the building, we like the location, but the unit mix isn't quite right. We probably shouldn't be buying that. And that's great. So we'll walk away from something like that. So we choose the operator before we choose the real estate.

So all of our operators, we encourage to share best practices with each other. What we want to do is be a facilitator of growth for all of them in many different areas. Sometimes that -- yes, that comes from Trilogy and taking best practices from Trilogy and rolling them out to other operators. Sometimes that comes from other operators and pushing them through Trilogy and through our system. I think where Trilogy is going to be most beneficial for the next probably 5 and 10 years is helping the regional operators achieve scale. A lot of -- so if you look at the NIC data, they predict by 2030, we're going to be underbedded by 576,000 units in senior housing. The cost to develop that many units, they estimate to be $275 billion. You have to triple the size of the largest health care REIT in 4 years in order to meet that type of demand. We need to scale far faster than people appreciate we need to scale. And the regional operators that we're partnered with need to be built to do that. Trilogy has a playbook to scale in that way without quality degradation. So if we can help them execute on that strategy and grow. It will make AHR stronger because what we're really trying to do is pick the winners from an operator perspective and help them get more and more assets and grow their businesses.

And then you mentioned kind of the lack of supply and the projected kind of shortfall of senior housing beds. Does that just provide kind of how do you kind of balance what residents' ability to pay, the ability to kind of increase rate? And then how do you ultimately see that, that shortfall of beds get solved? Is there anything on the regulatory side that you're worried about there?

Good question. Not anything that we've heard about. Our goal is not to price people out of the care that they need. Our goal is to provide the highest quality of care in our buildings so that our operators in our buildings are the preferred ones in the markets that they're in. What that means for rates 3 years from now, I think is anybody's guess, I'm sure that they'll be higher. I think affordability at the top end, if you're providing the highest quality experience, is very strong. I think the boomers have a lot of wealth that's been accumulated through not only their homes, but also through their trading accounts and even through pensions. I don't see affordability as being a problem at the top end of the experience where you're actually providing the best assets with the best operators and the best outcomes.

Yes. I think that's totally right. I mean the average length of stay in assisted living is 2 years. Someone moves in, most typically, they've just sold their house, which has appreciated probably no mortgage on it anymore. They paid it off likely. And so you can imagine whatever they're selling their house for is going to be more than enough for them to be able to afford to move into an assisted living for a 2-year period of time. And I think most importantly, especially true at Trilogy is we're proving out every day sort of the benefit that the quality of care that they're getting and the value proposition associated with being one of their buildings.

And then just within the SHOP portfolio, how much is AL, how much is IL? What's kind of the optimal mix there as you think about that? And what are kind of the margins of those as you think about those different pieces?

So within our SHOP portfolio, we're a little bit different than others. We're probably more focused on the defensive nature of health care real estate. And that means that within SHOP, you're more focused on assisted living than you are on independent living, assisted living is more a need-based product. You need help with activities of daily living in assisted living and independent living is more of a lifestyle choice. You're probably sick of mowing your yard and taking care of your house and having a windstorm come through and need to fix your roof and all that. You just want an easier life that's more curated for you. In our portfolio, we're about 80% assisted living and about 20% independent living because we saw through the last recession, when people have a hard time selling their house or even when home values go down, the reluctance to sell your house into a declining market is real. And that can have impact on occupancy in independent living. It can have impact on the strength of rate in independent living, that assisted living is more insulated from the trade that you get in exchange for that defensiveness is lower margin. So it's -- assisted living is going to be a lower-margin business because you're actually providing a human element, a care element that cost something, you get less flow-through to NOI for every incremental bed because there is a staff requirement for it. But we're willing to make that trade for the defensive qualities of it.

And you're also charging more for assisted -- I mean, to state the obvious.

There's a question that came in kind of on this topic. It's really just the opportunity to improve that operating margin. I mean, you kind of walked through the structural impediments to the margin relative to maybe other sectors. But where do you see the opportunity there on the efficiency side? I'd imagine it has to be on the expense side.

Yes, a little bit. So on the expense side, the biggest expense line item in senior housing is labor always, right? So the first thing you want to do is make sure you're not using agency labor, third-party labor that could be 2x per hour of what a typical person would get paid, and it's not because that person is getting that 2x the agencies, staffing agency is getting that profit so you need to get rid of agency. We've largely done that in our portfolio. I don't see that as a big problem right now. And accordingly, I don't see it as a great opportunity. I think overtime is still higher than it needs to be in the space. And we're working on things that can push that down, staffing solutions within the senior housing industry, I think, are becoming better. I think AI can play a role in that and help keep your costs down on the labor side of it. But really, there's probably more growth coming on the rate side than there is on the expense management side. And from a rate perspective, I think across the board, we're seeing people raise rates that are -- the increases are higher than inflation. And I don't think that's going to change anytime soon. I think most operators are trying to get back to a pre-pandemic operating margin which in assisted living was more like a 30% profit margin where today, our SHOP portfolio is in the low 20s.

And then you mentioned a few things there using AI to maybe help with labor efficiencies. Kind of can you talk about how you're using technology kind of broadly across the portfolio as you think about the opportunities to use it within the health care space and provide a better quality of care in addition to labor. And then maybe just within labor specifically, any initiatives that either Trilogy or your regional operators have implemented to kind of improve retention and kind of where does retention sit today relative to maybe pre-pandemic and how has that changed?

Retention is getting better. I think the labor market is better in the markets that we're in. I think Trilogy is obviously very focused on it. The reason is that -- and I got this totally backwards when I started working at AHR 10 years ago. I thought that we were tracking employee satisfaction to just see how employees were talking about the business. It's really canary in the coal mine on what the resident experience is like. If you have happy employees, then those happy employees are providing a different quality of experience for the residents in the building. So that's been crucial for Trilogy's execution for a long time and something that the other operators that we partner with understand and appreciate so we lean into employee engagement. We lean into employee surveys being useful to judge employee satisfaction. Fixing leadership issues within the community is probably the #1 thing that people ask for and want Trilogy make deep investments into their employees through training and also taking people that have come into the building, maybe facilities maintenance type role and helping them see a real career path at Trilogy. So I'm not kidding you they have an actual handout that looks like a marketing collateral for employees that shows you here is your path to go from minimum wage person to RN and every single step along the way to get there so that they can see what their career could end up being like at Trilogy that helps when employees feel like you're actually investing in them. And that's why their turnover is less than 40% in their facilities. That's an incredible number for this industry. On the AI front, just to pivot over to that. We're looking at everything that we can do. The real advantage that we have is Trilogy can be a test kitchen of sorts for a lot of different things and also has enough scale to be able to develop proprietary things themselves. I don't want to, in a public forum give the entire world the exact playbook on what we're doing, but I'll tell you that I think it's going to be very important for revenue management and setting of rates, especially as we move along the next 5 years to be very, very highly occupied buildings, and we're dependent on rate management to drive NOI instead of occupancy gains. I think from a search engine optimization perspective that AI can be helpful and some of the tech solutions that Trilogy is working on can be helpful and can be expanded throughout our portfolio. And I think there's 2 other ways that are kind of interrelated. In the skilled business quoting and getting paid for the services that you provided is an incredible headache and takes a lot of people to do it and do it well. If you can automate that through AI, which Trilogy is doing now and testing, not solely, they haven't reduced head count dramatically to do this. But I think over the next couple of years, you could see a situation where that becomes the norm and they're using AI to help make sure that they're actually getting paid for the care that they're providing and takes away some of the time that people need to spend working on that. And then the final component, I think maybe it's the most interesting, but we'll take more time. It's just how can you use AI for predictive analytics around care. If you have AI reading electronic health records and understanding, for example, what prescription somebody just went on and you can adjust the care plan accordingly to address issues and predict them before they happen. So let's say you go on a new prescription that people know will cause dizziness when you first go on it. They can adjust the care plan and say, "All right, when Gabe goes to the dining room, somebody needs to walk with him so that he doesn't have a fall." So it's minimizing the risk of bad outcomes in taking data and even wearable technology to give you vital signs to see what's going on with the residents and actually do something about it before it leads to a worse situation and maybe a hospitalization.

We have a handful of other questions that came in through live QA. So I just want to get to those. One is how is the average stay duration for, I guess, both on the senior housing side developed over time? And do you see a positive impact if people start to live longer, just based off of some of these advancements that are underway right now.

Longer length of stay should mean higher occupancy. So I think that's -- you can see the thread connecting those 2 things. I think the interesting thing, and maybe it's counterintuitive is in the assisted living, your average length of stay is 2 years shorter. In independent living, I would say, it's more like 3 years. But if you're really high-end independent living, I think people are moving into those in even younger age. So that could be even more than 3 years. It could be 5, 7 years. If you believe that it's more difficult to raise in-place rents on residents than it is to raise the street rate then I think you would prefer to have a shorter length of stay and more turnover in your building because you're capturing the loss to lease from the street rate. If you don't think that's a thing then, yes, longer length of stays would be preferred because of the occupancy effect. So in our portfolio, we're more focused on street rate optimization than we are necessarily pushing the in place because the in-place rent -- and don't get me wrong, we need to pull every lever, and that's important. But there is friction between the people that are in the building, providing care and taking care of residents and what they're willing to do from a rate pushing perspective on the people that have already moved into the building. Less friction, if you're just saying, hey, we're a high-quality provider, let's capture the value of that quality to somebody who's coming in and doing a tour, and you're saying this is our new rate than there is on somebody who's in the building.

Then the other question is, we've touched on this a bit, but maybe more on the federal level. What do you think are the current administration's health care plans? And how could it impact your company?

So the -- we haven't got a question about the minimum staffing rule in a minute. I don't think that's on your list either. So I think from a regulatory perspective, it seems better we don't have the same overhang and concerns that we thought we might before. There were some discussion in the past years about addressing which REITs and private equity can own health care. I think that was an interesting development, and that's much harder at the federal level with the current administration.

Yes. I think the federal government certainly had Medicaid, Medicaid funding on their radar. There was lot of consternation about that. And as predicted, they chose to attack sort of the eligibility side of it as opposed to the reimbursement side for skilled nursing. So it seems as though as an industry, we've been able to withstand any concerns there. I think that the federal government realizes that if they were to cut the funding for skilled nursing stays, by any reasonable amount, I think that they would be putting a lot of companies out of business. The margins on those are very thin. And theoretically, skilled nursing providers should not be getting rich. And so I think that they have understood that from past cuts. So I think we're in a pretty good shape as it relates to reimbursement.

Maybe just on the shop side, we get a lot of questions about when will new supply kind of come back. Do you guys have a view on when we could start to see a material pickup in shop development? And then just kind of with your acquisitions, like where are you acquiring today versus replacement cost in the context of when you think supply could come back, how much would rents need to rise?

Yes, we're getting into the lightning round now. So no, I think we're continuing to be able to buy below replacement cost, but we're certainly approaching it pretty rapidly. I think that construction probably pencils today at the very high end when you're charging really, really high rates. I think that in the more moderate level, I don't know that it pencils today. It all depends on what your cost of capital is and what you're willing to accept from a development yield. I don't know if it makes sense today, but I think it probably will very soon. I think in order to be able to get your desired returns, you probably need to underwrite double-digit rate growth in the next 2 years. And while I think that there is a chance that happens, I don't think it's a guarantee. So my guess is construction probably starts to pick up in 2027, maybe 2028. The reality is it takes a while. Usually takes a year to get permits, 2 years to build and 2 years to stabilize. So the reality for us, having already facilities on the ground is that it's going to be a while before we're going to see much of an impact on our occupancy.

Really rapid fire. Same-store NOI growth versus SNFs -- a couple senior housing next year in '27?

Yes. Well, for a couple of us that are predominantly in the long-term care business, it's going to be good. It's going to be double digits, low double digits. The majority of the health care REITs are more triple net based, so it's going to be much, much lower.

And more fewer of the same number of health care REITs a year from now?

I mean we've all heard what's out there, but there's a couple of companies. The reality is I think there should be fewer, but there's going to be more.

Thank you.

Thank you.