American Healthcare REIT, Inc. Q3 FY2025 Earnings Call

Thank you all for joining us. I’m Colby, your conference operator today. I would like to welcome you to the American Healthcare REIT Q3 2025 Earnings Conference Call. Now, I will hand 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 2025 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, changes related to our increased 2025 guidance 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 fact 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 7, 2025, or such other date as may otherwise be specified. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During the call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable measures calculated in accordance with GAAP are included in our earnings release, 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'll turn the call over to President and CEO, Danny Prosky.

Thank you, Alan. Good morning or good afternoon, everyone, and thank you for joining us on today's call. I am very pleased to report that the third quarter was another very strong quarter for AHR. We continue to build upon our strong first half momentum, generating same-store NOI growth of 16.4% across the total portfolio, marking our seventh consecutive quarter of double-digit same-store NOI growth portfolio-wide. This performance once again reflects the depth and quality of our portfolio, our strategic initiatives, which include leveraging our platform across our operating portfolio, the strength of our regional operating partners and the enduring demand tailwinds that support health care real estate. Within our operating portfolio, our RIDEA structured segments, which include our integrated senior health campuses, also known as Trilogy, and our SHOP segment continue to drive outsized growth, which is the result of our team's proactive and hands-on asset management approach. As I look across our industry, I maintain my conviction that this is the best operating environment for long-term care that I've seen in my entire 33-year career. This is most evident to me when reviewing our strong RevPOR growth and the fact that Trilogy and SHOP same-store occupancies are currently above 90% and continue to trend in a positive direction. Shifting to our external growth activity, we're executing diligently on scaling our operating portfolio with our regional operating partners. In aggregate, we have closed on over $575 million of acquisitions year-to-date, all of which is within our RIDEA segments. Among these new acquisitions, I'm happy to announce that we're expanding our highly curated stable of operators. We introduced two new relationships to our group of operators this year, which will broaden our geographic diversification while reinforcing our focus on operators that share our values, including a strong employee culture, ability to deliver ongoing outsized financial performance and most importantly, a keen focus on delivering high-quality care and results for our residents. I'd like to congratulate Stefan and the entire investments team, along with Ray Oborn and his senior housing asset management team again as they have continued to identify and acquire a tremendous volume of very high-quality managed senior housing assets. These acquisitions not only provide immediate earnings accretion to AHR, these assets should also provide strong ongoing organic earnings growth for years to come. Along with the acquisitions I just noted, the team has continued to backfill our pipeline of awarded deals, which now stands at well over $450 million. These transactions are expected to close in the fourth quarter and early 2026. As we execute on our external growth plans, we continue to demonstrate discipline and remain opportunistic in our capital markets and capital deployment activity, which should drive further earnings accretion in 2026 and future years. We're now on track to grow normalized FFO per fully diluted share by 20% over last year, while also continuing to improve our balance sheet metrics and leverage profile. As Brian will note during his remarks, our net debt to EBITDA at the end of the third quarter is now down to 3.5x. Our strategy remains consistent. We're not simply chasing near-term accretion. We are building durable long-term growth through operating alignment with best-in-class regional operators, disciplined capital allocation and capital markets activity while always putting resident care and outcomes first. Finally, I'm proud to note that in September, we published our inaugural corporate responsibility report, publicly disclosing the governance, social and sustainability priorities that have long been embedded in AHR's culture. This milestone reflects our belief that responsible stewardship and performance are inseparable. Before turning the call over to Gabe, I want to thank the entire AHR team and our operator partners for their exceptional work. Together, we are executing with precision and purpose for all AHR stakeholders, providing high-quality care and outcomes for residents, which is leading to strong financial performance for our shareholders. And now, Gabe, over to you.

Thanks, Danny. Operationally, the third quarter of 2025 was another strong quarter for us with outstanding results across the business. Once again, we delivered sector-leading same-store NOI growth compared to the third quarter of 2024. Not only did we sustain the momentum from the first half of the year, but we also built a solid foundation for continued success with strong occupancy gains in the third quarter prior to entering what's historically a slower winter season. That being said, occupancy trends into the fourth quarter suggest that seasonality could be muted due to the accelerating demand growth from the baby boomer population. Now let's dive into our results in more detail, starting with Trilogy. Same-store NOI grew 21.7% year-over-year. Occupancy averaged 90.2% in Q3, up more than 270 basis points from last year, while average daily rate increased roughly 7%. That performance reflects not only continued pricing power, but also ongoing improvement in quality mix. Within Trilogy, its high quality of care and outcome standards continue to drive outsized demand as residents, families and now to an increasing degree, Medicare Advantage plans seek out the highest quality of care providers. Trilogy is continuously working to add to and also to optimize its Medicare Advantage partnerships with the plans most aligned on quality, which is in turn increasing access for residents to Trilogy and driving more Medicare Advantage census growth across the Trilogy portfolio. We expect this mix shift to drive robust revenue growth that reflects the strength of the platform for two primary reasons. One, Medicare Advantage reimbursement rates are significantly higher than other reimbursement sources and growing faster than other sources; and two, increasing accessibility for Medicare Advantage plans provides a tailwind for continued census growth. So for example, Medicare Advantage accounted for 7.2% of total resident days at Trilogy during the third quarter, an increase from 5.8% a year ago. It's a great example of how Trilogy has proactively leveraged high-quality care and outcomes to identify the best partners and ultimately create economic value and yet again demonstrates Trilogy's remarkable ability to utilize many different operational and strategic levers in order to drive continuously strong growth. Turning to SHOP. Same-store NOI increased 25.3% with RevPOR up 5.6% year-over-year and NOI margins expanding nearly 300 basis points to 21.5%. We also achieved record move-in activity during the spring and summer seasons. And for the first time, like Danny mentioned, our SHOP same-store spot occupancy is currently above 90%. Those gains were achieved without significantly sacrificing pricing discipline, reinforcing our view that the secular demand for long-term care remains durable, especially for the highest quality operators as residents and families continue to invest in superior care and service. As demonstrated by our operating portfolio results, fundamentals remain extremely favorable. Construction starts across senior housing remain near historic lows, while demographic growth in the 80-plus cohort accelerates. These structural supply-demand imbalances should support a multiyear runway for further occupancy gains, rate growth and NOI growth. As we move into the winter months, we're confident and we're well positioned to maintain the occupancy gains achieved through the busier spring and summer selling season. Overall, we continue to view this as the early innings for long-term care demand growth that's being captured most effectively by operators with scale, quality outcomes and a strong regional presence. Trilogy and our SHOP partners certainly exemplify that. I'd like to thank each of our operator partners for their enduring commitment to their residents and their employees and their contributions to another very successful quarter for AHR. We know we could not deliver these results without them. Finally, our team is actively executing on our strategic initiatives designed to enhance our operating platform. Our strategic alignment with Trilogy unlocks unique opportunities for outperformance and value creation. For example, we're leveraging Trilogy's centralized revenue management system across other operating partners. The analytics and also the operational strategies and functionality from that program, which combines a multitude of factors, including market rates, occupancy, unit-specific attributes and discount control features have already contributed to our growth at Trilogy by optimizing revenue, especially with respect to highly occupied facilities, which we know is a category that's rapidly expanding. We're in various pilot phases with our regional operators to extend this tool among other initiatives we've identified across our operating portfolio. We continue to view this as a differentiator and a key component of our strategy as we plan for rapid expansion and look to support our regional operators as they scale to meet this transformative growth opportunity. I'll now pass it to Stefan to discuss our external growth activity.

Thanks, Gabe. Since our last call, we have been very active, closing a number of transactions while continuing to backfill the pipeline with equally strong and high-quality investments. In doing so, our investment strategy remains unchanged as we continue to focus on accretive relationship-driven growth. We're emphasizing opportunities where we have long-term conviction in the operators and markets and where our capital can directly improve care outcomes and long-term asset performance. During the quarter, we completed approximately $211 million of acquisitions and closed approximately $286 million of new investments subsequent to quarter end, bringing our year-to-date closed acquisitions to over $575 million within our operating portfolio. These transactions expand our exposure to high-quality assets in strong regional markets and deepen existing relationships with trusted operators. A key highlight of our recent activity is our new partnership with WellQuest Living, who now manages four communities we acquired in California and Utah. WellQuest aligns closely with our mission to deliver best-in-class resident care through integrated wellness-focused environments. WellQuest will complement our current SHOP exposure on the West Coast, allowing us to access new submarkets that screen attractively within our investment framework and offering us the ability to underwrite potential acquisitions that will leverage WellQuest's core care competencies as a high-quality needs-based senior living operator. WellQuest rounds out the new operator relationships we previewed earlier this year. And between WellQuest and Great Lakes management, it has already allowed our team to evaluate even more potential off-market opportunities, which is something we strive to do with all our trusted regional operating partners. Beyond acquisitions, we continue to optimize our portfolio mix. During the quarter, we executed $13 million of non-core dispositions, further concentrating our capital on assets within our operating portfolio that can deliver superior risk-adjusted returns. Our team has not slowed in identifying new opportunities to complement our existing investments year-to-date as we maintain a pipeline of over $450 million in awarded deals that are still in the due diligence process or that we have added since we provided an update in early September. We expect to close this awarded deal pipeline by the end of 2025 or early 2026. On the development front, we started several new development and expansion projects this quarter. Our in-process development pipeline now consists of projects with a total expected cost of roughly $177 million, of which we have spent approximately $52 million to date. We believe that these projects should extend our multiyear growth runway at attractive yields and the mix of new campuses, independent living villas, and wing expansions should provide solid income at various points over the next few years, allowing for predictable cash flow that will translate to retained earnings for future new development starts to help mitigate future funding risks. To summarize our executed investment strategy thus far and our future plans, we are deploying capital deliberately, favoring operating partnerships where we see the best risk-adjusted returns, prioritizing newer assets and maintaining discipline on underwriting. We believe this strategy will prove resilient as we scale across our operating portfolio with our various partners, and we expect it will generate strong, sustainable returns next year and in the future years to come. With that, I'll turn it over to Brian.

Thanks, Stefan. The third quarter of 2025 was another very solid quarter of organic earnings growth, disciplined execution of external growth by acquiring assets that we expect will provide sustainable earnings for years to come as well as select capital markets execution. We achieved normalized funds from operations of $0.44 per fully diluted share in Q3, reflecting a 22% increase year-over-year. This increase was made possible by greater than 20% same-store NOI growth from our operating portfolio segments, which continues to propel our earnings, additionally buoyed by the strong initial performance from the assets we've added to the portfolio over the last three quarters. Given our visibility into Q4 and the solid results achieved year-to-date, we are increasing and narrowing our full year 2025 NFFO guidance to a range of $1.69 to $1.72 from $1.64 to $1.68 per fully diluted share, implying growth in excess of 20% year-over-year at the midpoint. This increase is driven by increased organic growth expectations and as we enter the remainder of the year with RIDEA spot occupancy north of 90% across our operating portfolio. As such, we are increasing our total portfolio same-store NOI growth guidance to a range of 13% to 15% from 11% to 14%. This increase is comprised of the following changes to segment level same-store NOI growth guidance. Integrated Senior Health campuses increased to a range of 17% to 20%, reflecting continued strength at Trilogy. SHOP increased to 24% to 26% as a result of the solid occupancy momentum through the summer selling season. Outpatient medical increased to 2% to 2.4% from the prior range of 1% to 1.5%, given positive renewal activity. Triple-net leased properties increased to negative 25 basis points to positive 25 basis points. During the quarter, we sold approximately 2.9 million shares through our ATM program for $116 million in gross proceeds, and we settled 3.6 million shares under a previously announced forward sale for another $128 million. We also entered into new forward agreements totaling 6.5 million shares for $275 million in gross proceeds, providing additional funding flexibility as we pursue external growth opportunities. Our disciplined capital markets approach allows us to match equity inflows with investment timing, minimizing dilution, preserving optionality and building further capacity to continue adding high-quality assets to our portfolio. That discipline has also allowed us to continue to improve our balance sheet even as we've executed more than $0.5 billion of accretive acquisitions this year. Our net debt-to-EBITDA ended the quarter at 3.5x, representing a 0.2x improvement from the end of the prior quarter and a 1.6x improvement from the third quarter of 2024. Stepping back, 2025 is shaping up as another milestone year for AHR, defined by significant organic earnings growth, continued deleveraging to provide capacity to scale our portfolio with our regional operating partners. As we enter the final quarter, our focus remains on maintaining this momentum and positioning the company for another strong year in 2026. With that, operator, we'd like to open the line for questions.

Great. Congrats on a great quarter. Just one quick one and a follow-up. I think the 90% spot occupancy, I think, was a sort of a key marking point for investors and the thesis was always that there would be operating leverage at this point to continue the growth going. So I just wonder if you could talk about just how much more occupancy upside do you see from here realistically in the portfolio and the pricing strategy as you sort of hit this point to continue to maximize growth.

I'll start by addressing your question. The maximum increase from 90% to 100% occupancy is 10%. Many people ask where I think we will be at the end of next year and what the maximum might be, and honestly, I don't have a clear answer. What I've consistently stated is that I expect over the next few years, as well as over the past couple of years, the metrics will continue to improve due to supply-demand fundamentals. We've observed occupancy rising, RevPOR increasing, and margins and NOI improving. I anticipate this trend will persist, although not every quarter will necessarily show higher occupancy compared to the previous quarter. We've seen some fluctuations, including a slight decrease at the start of this year due to flu impacts on our SHOP portfolio. Nonetheless, Trilogy performed well in Q1 thanks to the skilled side of the business. Now that it's early November and just a month since we ended the quarter, I don't have any new insights that would change my outlook. However, with the holidays approaching, we often experience a small decline right before this period. Historically, Trilogy's skilled occupancy dips a bit before Christmas and then rebounds during the first 10 days of January, which is a pattern we've seen consistently. I believe this trend will continue. I also expect to be able to price increases above inflation, potentially around 200 basis points, sometimes slightly more or less. If inflation is at 3%, I think we should target a 5% increase or higher. As occupancy rises, this pricing becomes easier to achieve, and I foresee the positive trend continuing. Determining the maximum growth potential is quite challenging.

Great. And then if I could just get a quick follow-up in there. Clearly, you guys have been busy on the external growth front in terms of starts, acquisitions, the pipeline. But I guess my question is just there was a Wall Street Journal article about a large PE player maybe even selling some senior housing. Just can you talk about the competitive environment? Why hasn't it gotten more competitive given some of the unlevered returns that you guys are getting in the space?

Yes, I saw that article too. I know that at least one of our acquisitions was from that seller, and possibly more, but one is certain. I think there have been a few more buyers recently, but I'll let Stefan provide more insight since he is closer to the details. Additionally, as industry results improve, more opportunities have arisen. You’ve likely noticed that more people are entering the market as the properties they've developed over the past 5 or 10 years begin to perform better. Consequently, there seem to be more assets available. Demand may have increased slightly, but supply has also risen. Stefan, what's your take?

I think that's exactly right. Many people have been hesitant to sell, waiting for performance to improve before making any decisions. Now that this is occurring, some private equity groups, even those that may have surpassed the expected duration of their funds, are beginning to take these assets to the market. Consequently, a greater number of assets are being introduced. However, it's important to note that this is RIDEA and it's a challenging business. Entering this market is difficult, and it requires a significant amount of time to understand. I don’t believe they will jump in without being careful about their approach to this market or industry.

So I want to go back to a topic from last quarter and something, Gabe, that you hit on a little bit in your prepared remarks. And just kind of help me understand the step down a little bit in ADR growth this quarter versus last quarter, specifically within that skilled segment of Trilogy. And would you just expect over time Medicare Advantage to continue to improve on a sequential basis given that partnership that you had previously put in place?

Yes, thank you for the question, Austin. Trilogy has several strategies to enhance the average daily rate in their skilled business. This includes optimizing the quality mix by focusing on Medicare and Medicare Advantage plans while reducing reliance on lower reimbursement sources. Given that Trilogy offers high-quality care that incurs significant costs, they are concentrating on those payer sources. As occupancy increases, it becomes easier to prioritize these plans. Additionally, within the Medicare-driven payer sources, Medicare Advantage plans show considerable pricing variations across different partners. Trilogy is actively seeking Medicare Advantage plans that share their commitment to quality and provide appropriate reimbursement aligned with the care they deliver. I believe they will gain more flexibility and consistently reassess their partnerships to ensure rates are justifiable. Therefore, they should be able to maintain their ability to optimize these partnerships and drive rates with Medicare Advantage. On the downside, Medicare growth is not as strong as it was last year due to its retroactive nature in relation to inflation, which has recently moderated. Last year, Medicare experienced a rate increase of over 6%, but this year the national rate is projected at 3.2%. Trilogy is expected to be slightly above that, not significantly. This may present a growth challenge in Q4, but we anticipate it will be partially counterbalanced by gains in Medicare Advantage.

That's very helpful. And then maybe sticking with Q mix, should the improvement in Q mix within Trilogy be a driver of both NOI growth and margin expansion as that continues to improve? Or is the trade-off and higher rate, an offset to the higher senior housing margin portion of it?

Yes, the senior housing beds are distinct from the skilled beds. You will notice an increase in Medicare and Medicare Advantage and a decrease in private pay and Medicaid. Additionally, Medicare and Medicare Advantage will yield higher net operating income and greater margins compared to private pay and Medicaid. Regarding the assisted living and independent living beds, unless Trilogy decides to convert a wing from assisted living to skilled nursing, these remain separate lines of business. Does that make sense?

Yes. No, that's helpful. I mean I was talking about the entire component because the margin stepped down sequentially within Trilogy same-store pool. I recognize there's some short-term expense maybe headwinds in there, but just talking kind of bigger picture and over time, given the fact that I think the resident days component of senior was up over 200 basis points sequentially and yet that margin stepped down. And I'm just trying to get a sense of how that trends over time because obviously, the rate you're getting on the senior housing piece within Trilogy is much lower than the rates within the skilled component. So just trying to balance those two, but understand how that flows to the bottom line as well.

I expect margins to continue improving, although that doesn't mean they will increase every single quarter compared to the previous one. Margins this year were better than the same quarter last year, although they did dip a bit for Trilogy in the third quarter compared to the second quarter. We experienced something similar last year. Several factors impacted the margin in Q3, and it’s not just one thing. For instance, Trilogy purchased a significant number of flu vaccines in Q3, which limited the number of available beds. Although it's a large expenditure, revenue from those vaccines won’t be realized until later when the shots are administered. Additionally, there are costs associated with employee health insurance since Trilogy is self-insured, leading to higher expenses as employees reach their deductibles. It's a combination of various factors. The margin in Q2 had a substantial increase compared to Q1. Over time, I anticipate that margins will keep improving, even though there may be a quarter where the margin declines slightly compared to the previous quarter.

And keep in mind, Trilogy is Midwestern concentrated, right? So the winter months come with higher expenses just related to the weather and things like that. But to Danny's point, I think it's spot on. We're not sacrificing margin to go into two different Q mix here. We do expect that to result in higher margin.

I wanted to touch back on Gabe's earlier comments in his prepared remarks about leveraging Trilogy's revenue management system with your existing SHOP tenants. I mean how much of the portfolio of that traditional SHOP portfolio is currently utilizing Trilogy software here? And can you provide some examples on how that's driving better results? I mean, are we seeing that in the numbers today?

Mike, that's a great question. I believe we're in a unique position, and our relationship with Trilogy is a key advantage for us as they operate at a high level. For those who might not be aware, we have a distinctive incentive plan with Trilogy that includes a manager equity plan, allowing us to issue their incentive compensation in AHR stock. This aligns their incentives with our other SHOP operators in a way that is quite special. This arrangement provides Trilogy a financial motivation to engage with our operators and share best practices, which has been happening for years. This year, we enhanced our efforts by introducing assessment tools and dashboard capabilities from Trilogy's platform for our shop operators who wish to participate. I don't want to exaggerate our current position; the numbers we see today don’t fully reflect the benefits of the Trilogy platform yet, as we are still in pilot phases with operators. Over the next year to 24 months, I expect to see a significant impact from Trilogy’s platform as we dive deeper into it and optimize its use. It won’t just focus on revenue management; it will also involve sales, marketing, search engine optimization, employee training, and retention strategies, along with potential IT solutions. Currently, we're utilizing Trilogy’s development expertise to find opportunities within our existing SHOP portfolio, allowing us to replicate their successful expansion strategy for highly occupied buildings on the land we already own, which helps mitigate development risks while achieving high IRRs. While there aren’t many funds available for this, we are steadily growing in every possible way and making the most of our partnership with Trilogy.

Yes. So we've already identified the first non-Trilogy campuses. We'll be utilizing Trilogy's development arm to do expansions and add builds.

To clarify, we are not currently planning to pursue ground-up development with other operators through Trilogy. Our strategy focuses on capitalizing on existing opportunities within our portfolio to expand the buildings we already own.

How receptive are these operators to having the system kind of rolled out into their platform? And I guess, how difficult is it to actually implement? I mean, are we talking about a few quarters here to kind of get it implemented? Or is it a longer-term process?

It's a great question. I think the reason why we're partnered with the operators that we are is because they're very good. With being very good, certainly comes a reluctance to have somebody else tell you what to do. They certainly are reluctant to having REITs tell them how to run their businesses, and I completely understand why. They want to run them the way they do. It's, I think, far easier when you see somebody like Trilogy, who's also an operator who's gone through the same things that they have, who has the same issues that they have, but can demonstrate that they've executed at a high level on certain things. I don't expect Trilogy to be de facto operating for other operators and using every one of these different verticals and strategies to push through to them to force them what to do. What I do expect is for us to be able to identify certain soft points in certain operators and be dynamic in it and suggest, hey, if Trilogy can help you in this particular issue, please utilize them and do it. It also, I think, will be really helpful for operators that need to scale. So we prioritize regional operators because we think it provides better quality outcomes for our residents and you can control the culture better, provide upward mobility for your employees. There's a lot of benefits that come from it. What you sacrifice is a little bit of scale and resources. If we can augment what they already do well with just some back-office support and more resources to help them scale, I think it's a benefit for both and people are more willing to partner with Trilogy on those initiatives as well.

And by the way, I would just add to that, that this is really a lifelong journey. I mean Trilogy was a great operator when we bought into them 10 years ago. They're a much better operator today. And I would anticipate that they will continue to learn and grow and change and evolve. And all of those things would be available to our operator base.

And some are more receptive than others.

My first question is about your pipeline. So I know this last quarter and then this quarter, we've been seeing an acceleration from the $300 million to $450 million. So I was wondering if you could add a few comments about that momentum and how to think about that going forward.

Yes, thank you for the question. Reflecting on where we were a year ago, we were primarily focused on acquisitions where we had an advantage, and we began to explore opportunities for external growth. At that time, we were just starting to build our pipeline. What you’re observing now is a result of that effort, along with the addition of two new operators to our team. It has been a steady progression in how we reached this point. We are now seeing the results we anticipated, which is setting us up for a strong finish to 2025 and a positive start to 2026.

Yes. So Farrell, I can't tell you what we're going to do in 2026. But I can tell you that we're going into 2026 with a much more robust pipeline than when we entered 2025 simply because our stock didn't reprice until late 2024 to the point where external growth became very attractive. But I feel pretty good about 2026.

Okay. And I also just wanted to get any updated thoughts on your MOB portfolio, seen an improvement in performance also with the guidance bump, but we've also seen peers selling large chunks of MOBs. I was curious if your thoughts around reinvesting yields for the sale of MOBs or if you're content with the current performance.

This is Danny. We began selling MOBs about four or five years ago and have sold roughly one-third of them. At our peak, we had around 112, and currently, we are in the vicinity of 70. While we've sold one-third in terms of the number of buildings, the impact on NOI is less than one-third since we sold the smaller and lower-growth properties. As a result, we are seeing some growth in our remaining MOBs. During COVID, MOBs accounted for about 35% of our NOI, but last quarter that dropped to under 17%, and I expect that figure will continue to decrease. We are divesting some MOBs, and although most have been sold, there are still a few we plan to sell this year and next. Meanwhile, our RIDEA segment, including Trilogy and SHOP, is expanding at a much faster rate. We are reallocating the cash from the sale of MOBs into seniors housing, and I anticipate this trend will persist. The remaining MOBs in our portfolio are ones we find favorable; they tend to be larger, institutional-grade properties, and I believe they will produce more growth compared to those we've sold. While we're not looking to exit the business entirely, we do not view it as the best option for risk-adjusted returns at the moment. We haven't acquired an MOB in several years.

So we touched on this a bit already, but within the Trilogy business, the percentage of resident days coming from Medicare, Medicare Advantage has declined modestly as the year has progressed. I guess, is there a seasonality component to that? Or has it become, I guess, incrementally more difficult to push occupancy from those payer sources in recent months?

You're exactly right, Mike. There's a seasonality component to it. So typically, the trough of occupancy for skilled nursing is in September each year. You see through the summer months, kind of occupancy declines a little bit and then ramps and peaks in Q1 of the year kind of in the colder seasonal months. What we're seeing, though, this year is less seasonality than what we typically do, and that's what's driving Trilogy's 270 basis point plus occupancy increase year-over-year.

All right. And that same, I guess, seasonality applies to like the payer sources. Is that fair?

Yes.

And then I guess, sticking with Trilogy, with the higher acuity versus last year, how much have they had to increase headcount in recent quarters? And how quickly would Trilogy be able to pull back on expenses if there is a scenario where it does become harder to achieve additional increases in acuity?

Honestly, I can't provide an exact figure on the headcount they've added. I can say that when they need to adjust their staffing, they usually do it by utilizing their flex force or increasing hours rather than hiring more staff. They established their own travel nurse organization around the time of COVID, and if they require more or less staffing, they rely on those Trilogy travel nurses to adjust their workforce accordingly. It's more about adjusting their current staff rather than hiring and letting people go.

Trilogy has an industry-leading turnover rate, which is around 40%, whereas their peers typically experience a 100% turnover. This is due to Trilogy's excellent management, allowing them to retain their employees. Hiring at Trilogy is an ongoing process, as they consistently replace the 40% of staff that leave and strive to enhance their workforce. While some of this is influenced by census changes, it is more about the continuous nature of operations at the company.

Maybe to speak for the first one, can you speak about the deal volume and the competition for the newer senior housing that you have identified? And how often are you likely to compete with the other public REITs for deals in your market?

It doesn't seem like we compete all that often. We typically engage in smaller transactions, such as acquiring one or two buildings, rather than large deals worth $0.5 billion or $1 billion. This doesn't mean we haven't undertaken or wouldn't consider such large transactions in the future. Most of the deals we pursue come to us through our operating partners, and a substantial portion of them are sourced in this way. When I assess the competitive landscape for bidding, while there are some other REITs involved, it tends to be more frequently non-REIT competitors. Stefan, do you have anything to add?

Yes, I would agree with that. About half of the deals we've closed in our pipeline have been off market. One of the benefits of adding WellQuest and Great Lakes to our operator pool is that we are diversifying into new markets, allowing us to discover additional locations that align with our investment goals. Moreover, we have been able to collaborate with them on several deals, as they are bringing opportunities to us directly. Regarding other marketed deals we are competing for, it’s truly a mixed situation. We do occasionally encounter REITs and other private equity firms that have been involved in this space for some time, and we also see interest from local investors and operators.

Thank you for the information. I have a follow-up question: Are there any best practices from regional operators that could benefit Trilogy, particularly in new markets like Wisconsin? Is it a two-way relationship? Has it been reciprocal?

That's a good question. I mean I'm sure they have. I mean we have an operator summit every year where a big chunk of it is talking about best practices. I'm trying to think of some of the specific things. Gabe, if you give any color or Stefan?

Yes, the operator summit is very well attended. Regardless of who is in the audience, the operators discussing their best practices are receiving good attention. We have definitely observed some cooperation and collaboration among the operators on specific aspects of their operations, such as pricing strategies like bundling and unbundling. There have been several instances where our operators have gained from each other's knowledge and experience.

Now that we're seeing more SHOP deals come in, can you talk a little bit in more detail around the acquisition strategy? Do you have a view of independent living versus assisted living versus memory care? And then are you targeting unstabilized deals or stabilized deals or you just more agnostic? Just trying to get more understanding of the strategy going forward.

I would say all of the above. In comparison to Welltower and Ventas, we likely have a higher acuity portfolio, with more assisted living and memory care, although we do acquire independent living as well. We're focused on quality buildings that can deliver strong earnings growth over the next five years, rather than just looking for immediate accretive purchases at a 7.5% or 8% cap rate. Our acquisitions from last year and this year tend to be newer properties, many built within the last decade. While we prefer newer buildings, there has been limited development in the past five years, resulting in fewer new products available. We have some stabilized assets in the 90% range that are at a more stabilized cap rate. Additionally, many of our newer assets, like the five-building portfolio we acquired from Trilogy, contain buildings that opened within the last year. While these buildings are new, they aren't stabilized yet. With stabilized buildings, you're looking at a lower in-place cap rate, more growth potential, and once stabilized, they tend to yield higher returns than already stabilized properties, often at a lower price per unit. You get more of a discount to replacement costs on unstable assets compared to stable ones. Overall, we're consistently searching for assets that can provide strong organic earnings growth in the years ahead.

Got it. And maybe just as a related follow-up. Just maybe can you talk a little bit more about the process and what you're focused on? Are you focused on the operator? Are you building a data platform to analyze acquisitions in micro markets on certain demographics or incomes or home values? Just trying to get an understanding of where the focus is.

I'll start off and then let Stefan finish. I'll handle the easier part. We usually identify the operator before the building. We prefer to collaborate with our existing operators and present them opportunities in their market. When we visit a site, they accompany us, and we seek their opinions on the building. Often, they are already familiar with it, possibly having managed it before, or they can suggest properties in their market that we might acquire before they hit the market. Typically, we don't find a building, secure a contract, and then decide on the operator. Instead, we seek the operator first. For Great Lakes and WellQuest, we identified them well before looking for buildings. We collaborated with them to build the portfolio, which is why we already have a significant number of assets with each operator. However, I understand that the processes may vary, so Stefan might be able to provide more insight on that.

Yes. That is the main point. We have been focusing on identifying the right operator, which is the foundation of our strategy. Our goal is to find operators who have expertise in specific markets and regions. From there, we identify potential communities for acquisition, working closely with our operators. When we receive a marketed opportunity, our first step is to consult with our operator in that region to gather their insights. If the opportunity is promising, we collaborate on underwriting it, tour the property together, and stay aligned throughout the entire process, including the transition. This approach gives us stronger confidence compared to trying to identify properties on our own and then searching for the right operator. We believe it's essential to prioritize working with the operator first.

I wanted to follow up on the pipeline. Is the existing pipeline mainly with current operators in Trilogy, or are there other new operators you are considering adding to the mix?

I believe all the operators are currently part of Trilogy. We do not have any plans to include operators outside of our existing grocer.

Including WellQuest and Great Lakes, of course, now considering them existing operators.

Yes. And then I guess just following up a little bit around the kind of competition just as senior housing continues to perform well. Are you seeing any changes kind of with asset pricing as you kind of look at the opportunity set?

I think, as I mentioned earlier, we have not seen much of a shift. Perhaps there's been a moderate uptick, but it's been very stable. Buyers are still being very efficient in how they're underwriting, and we haven't seen any consistent fervor in terms of driving up pricing.

All right. Well, thanks, everybody, for joining. We really appreciate your interest. And obviously, if there's any follow-up questions, feel free to reach out via myself, Brian, Alan, and we're always available. Thanks a lot. Have a great weekend.

This concludes today's conference call. You may now disconnect.