American Healthcare REIT, Inc. Q3 FY2024 Earnings Call

Thank you for joining us. My name is Briana, and I will be your conference operator today. I would like to welcome everyone to the American Healthcare REIT Third Quarter 2024 Earnings Conference Call. Please note that this call is being recorded. I will now turn the call over to Alan Peterson, Vice President of Investor Relations and Finance. Please proceed.

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 operational 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 the 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 four 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 opportunities 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's 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 two 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 the 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 unlock 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.

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, having 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.

Our first question comes from Joshua Dennerlein with Bank of America. Please proceed.

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 eight years that we've owned the company to be the best management team that we've worked with, certainly 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 as 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, when there is a loss at a property and you receive the insurance proceeds, that is not considered real estate revenue or real estate NOI. It’s really just one part of a mixture of other non-real estate amounts. As I mentioned, it's been approximately $0.04 per share so far through the end of Q3, and we expect maybe another $0.02. While it’s not entirely insurance, that is the largest component.

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

So, as occupancy continues 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 do you think about that mix going forward for overall portfolio occupancy, senior housing versus skilled?

Yes. This is Danny. During our first call of the year for Q1, we noted that Trilogy's occupancy rates were nearly equal between the assisted living/independent living (AL/IL) and skilled sides, both increasing nicely. We anticipated that the AL/IL occupancy would exceed skilled occupancy, which it has by about 150 basis points, as we expected. The business models differ significantly; on the AL and IL side, we aim to maximize occupancy as much as possible while also focusing on revenue per occupied room (RevPOR). Higher occupancy is more beneficial there. In contrast, Trilogy's skilled model is oriented towards short stays with higher acuity, where most admissions come directly from hospitals. This also serves as a significant pipeline for the AL/IL business, as many residents either return home after a few weeks or transition into AL or IL. Even if they return home, they often come back to Trilogy's AL or IL in the future. Thus, our goal isn't to reach 98% occupancy on the skilled side; it's crucial to have available beds for hospital admissions. Although Trilogy could easily boost skilled side occupancy into the 90s by filling those beds with Medicaid patients, that’s not the aim. We prefer to maintain occupancy in the high 80s to low 90s while focusing on a higher mix of Medicare and private pay patients. With Medicare Advantage becoming an increasingly important part of Trilogy's offerings, they are selective in negotiations. They may accept Medicare Advantage patients, but only at higher negotiated rates than initially offered by insurers. Fortunately, Trilogy is in a good position to be selective since they are a dominant provider. High-quality partnerships are essential for maintaining Star ratings in Medicare Advantage. Ultimately, our focus is less on maximizing occupancy and more on maximizing net operating income (NOI).

Yes, that makes a lot of sense and gives us a lot to consider. You also mentioned the improvement in your cost of capital and the lower leveraged balance sheet. When you look at the opportunities ahead, can you explain the difference between the targeted annual investment in some of the Trilogy opportunities that you could support with free cash flow and the pipeline of external investment opportunities, particularly regarding the SHOP segment that you and Stefan talked about?

Sure. Our cost of capital has significantly improved this year, making external acquisitions much more beneficial than they were about six months ago. We had substantial growth this year, completing over $650 million in acquisitions, with $500 million coming from the purchase of Trilogy. The deals in Washington, Oregon, and a smaller deal in Atlanta were all non-competitive, as we were the only bidder. We were able to acquire the Washington and Oregon properties because we acted as the lender, and the Atlanta deal stemmed from our relationship with the receiver associated with our Washington portfolio. This year, we also opened four new campuses and expanded several others with Trilogy, pushing our growth well beyond the $650 million mark. Trilogy still has numerous growth opportunities, with potential annual developments between $100 million and $200 million, which will include new campuses, villas, and expansions. We currently have nine properties at Trilogy that we either lease or do not fully own. Earlier this year, we acquired three assets at roughly a 9.1% cap rate on our rent. Although we don’t have buyout options on the four leased properties, we believe we have a good chance to acquire them at similar pricing. The remaining five are under a joint venture structure where we own 50%. We have purchase options on those that could be executed once they stabilize, and there is a possibility to buy them out sooner. Alongside the expected annual developments of $100 million to $200 million at Trilogy, we also have nine additional assets we can potentially acquire. Next year, I anticipate us pursuing more external growth than we did this year, largely due to our improved cost of capital, and we have already started to boost that growth pipeline. More updates will be available next year.

We have been very clear about our focus on SHOP assets, which we believe offer the best risk-adjusted return at this time. Our strategy will not involve engaging in bidding wars through brokerages; rather, we plan to be more targeted. This is one of the advantages of our size, as we have regional operators who are actively finding transactions in those markets. They understand the assets and the demographics. Additionally, we have established relationships with special servicers and lenders on deals that may have financing issues. Being a well-capitalized buyer gives us a significant edge. We are avoiding bidding wars and are committed to being disciplined in our underwriting of 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. I'd like to mention a few points regarding this. Our RevPOR growth has outpaced our ExPOR growth, which aligns with our expectations, and we anticipate this trend will continue. In terms of expense growth, we appear to have returned to pre-COVID levels, with typical wage growth in the range of 3% to 3.5%, which has been the primary pressure on expenses in recent years. Regarding ExPOR, as occupancy increases, the fixed costs are spread across a larger number of occupied units, which contributes to lower ExPOR growth. We expect RevPOR growth to keep surpassing ExPOR growth in the future. We are optimistic about the supply-demand dynamics and believe occupancies will rise, allowing us to implement higher rates. Earlier this year, we indicated that we expected ExPOR growth to rise each quarter, and it has. Concerning the possibility of inflation returning, it is clear...

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 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?

I would say employment has been and continues to be the biggest pressure point for this business. Trilogy serves as a great example; their employee retention is back to pre-COVID levels. After COVID, employee retention understandably dropped, but we have returned to where we were before, which is considered industry-leading. There is always pressure on the employee side, and attracting and retaining employees is crucial for the business. If we start to limit the number of employees in the country, that could potentially harm our business, but it's difficult to predict.

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 training program has been a huge success.

Our next question comes from 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, 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 that 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 an 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?

I think you brought it up. Regarding real estate, the NOI does not include the $0.02 from miscellaneous income. Your numbers seem accurate. There is indeed seasonality involved, which is more apparent now than before because, previously, everything was on the rise, and those occupancy increases were overshadowing the seasonality inherent in the long-term care sector. While I mention 39.5%, I wouldn't just assume that number will carry over to Q1. As you noted, you're not seeking guidance for 2025, and I am not providing it either.

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 believe the acquisitions you've observed, particularly the Washington and Oregon portfolio, were advantageous for us because we were involved in the mezzanine debt on certain Freddie debt. This positioned us well. The Atlanta deal followed a similar pattern, where our relationship with the special servicer gave us an advantage. We have been working to cultivate these relationships and expect to continue seeing opportunities from them. However, I wouldn't say we anticipate a flood of these transactions. There are certainly situations where borrowers are compelled to act while lenders are accommodating. Yet, many lenders and borrowers may also choose to hold onto their assets as we see overall performance improving in the industry. In terms of deal flow, we plan to engage with brokers and explore brokered opportunities, but also place significant emphasis on off-market deals. These are opportunities that our operators might identify due to their focus and relationships, and we may also consider properties owned by our operators that they wish to sell. We have numerous pathways to pursue, and our strategy will not merely rely on widely marketed portfolio deals. Instead, we will adopt a targeted approach in seeking new transactions.

Yes, I think that's absolutely right, Stefan. These are opportunities we are currently able to exploit. Looking ahead a year or two, I’m not sure that every deal we secure will come through special servicing and similar avenues. We have a chance to source leads for acquisitions from our operators and our special servicing relationships. Ultimately, we will keep evaluating deals that come through brokers. Regarding the financing market, it is not fully operational yet, but that's okay. We are not actively seeking additional secured debt or project-specific financing, so we can manage without it. To address your question related to our capital sources, the most cost-effective source of capital is the internally generated retained earnings, meaning the profits we've earned beyond what we paid out in dividends. This is followed by disposition, as we maintain discipline about sales prices and cap rates. The availability of equity is somewhat uncertain and comes at a higher cost. While we recognize the need for growth in our earnings, the cost of equity is not just our dividend yield. Therefore, this outlines our capital hierarchy, and it's advantageous that we do not need project-specific secured financing at this time, given the current state of the market.

To address your question about the pipeline, in the last couple of months, we have seen significant improvements at the company. As a result, we have acted more swiftly in evaluating deals. In that brief timeframe, we have considered over $1 billion in potential transactions, with approximately $800 million on the SHOP side. There are many opportunities for us to explore and pursue new initiatives.

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

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 two 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 range of 5.5 to 6.5. 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 assistance with this. To everyone on the call, thank you again for taking the time to join us today. I'm looking forward to seeing many of you next week at NAREIT and to having more of these discussions. As I mentioned earlier, we are very excited about the upcoming years in this business. Have a great rest of the week, everyone, and we will see you next week.

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