Earnings Call Transcript - AHR Q2 2024

Operator, Operator

Hello and thank you for joining us. I would like to welcome you to the American Healthcare REIT Q2 2024 Earnings Conference Call. All lines are muted to avoid background noise. After the speakers' remarks, we will have a question-and-answer session. I will now hand the conference over to Alan Peterson, Vice President of Investor Relations and Finance. Please proceed.

Alan Peterson, Vice President of Investor Relations and Finance

Good morning. Thank you for joining us for American Healthcare REIT's second quarter 2024 earnings conference call. With me today are Danny Prosky, President and CEO; Brian Peay, Chief Financial Officer; Gabe Willhite, Chief Operating Officer; and Stefan Oh, Chief Investment Officer. On today's call, Danny, Gabe and Brian will provide high-level commentary discussing our results of operations, financial position and other recent news relating to American Healthcare REIT. Following these remarks, we will conduct a question-and-answer session with covering research analysts. 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, including our earnings release furnished yesterday 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, August 6, 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 measures calculated in accordance with GAAP are included in our earnings release and supplemental information package. You can find these documents as well as our SEC filings and the 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.

Danny Prosky, President and CEO

Thank you, Alan. Good morning and good afternoon, everyone and thank you for joining us today. As we enter the latter half of 2024, demand growth for healthcare real estate remains strong as evidenced by the performance of our diversified healthcare portfolio during the first half of the year, with 15.7% total same-store NOI growth in the second quarter of 2024 and 14.4% same-store NOI growth year-to-date. Within our four property segments, we continue to observe increased demand from an aging population which we expect will extend at least into the latter part of the decade. This demand and resulting internal growth within our portfolio is surpassing our original conservative estimates, prompting us to increase our guidance for both total portfolio same-store NOI and earnings for fiscal year 2024. Our anticipated same-store NOI growth for 2024 has been increased to a range of 12% to 14%. Revised normalized funds from operations guidance now stands at $1.23 to $1.27 per fully diluted share. Brian will provide more details regarding our revised guidance later in the call. I want to express my gratitude to the entire team here at American Healthcare REIT and our regional operating partners for their commitment to delivering excellent results for all of our stakeholders. Our team's hard work is demonstrated in our quarterly results. Reflecting on the current environment for healthcare real estate, I've spent 32 years working within the healthcare REIT space and have never been more optimistic about our business's growth prospects. The strength we have seen over the last 18 months within our industry is the most robust I have observed, and the outlook for our company, at least over the next 3 to 5 years, looks extremely promising. When evaluating our portfolio, I believe we are well positioned to continue delivering sector-leading performance within our managed portfolio which includes our integrated senior health campuses and SHOP segments. We are particularly excited about our assisted living exposure. Industry data from the second quarter shows that combined assisted living rate and occupancy growth has outperformed compared to other long-term care sectors for 11 consecutive quarters. Industry-wide assisted living occupancy now stands at approximately 85% in the second quarter of 2024, which equals pre-COVID levels. While we have exposure to all long-term care segments, the majority of our portfolio is within assisted living units and we are seeing the industry trend of AL outperformance within our portfolio, although our results are further surpassing certain benchmarks. Our same-store integrated senior health campus and SHOP segment occupancies exceeded the industry assisted living occupancy average in the second quarter of 2024. Our same-store SHOP assets couple above industry average occupancy with accelerating RevPOR growth year-over-year in the second quarter. These results are a testament to the quality of our portfolio and the quality of our operating partners. While still early in our history as a traded REIT, we hope that through all the interactions with the investment community, we are establishing ourselves as leaders in both the public markets and the healthcare real estate sector. Nevertheless, with all the additional work, we're not losing sight of the strategic pillars outlined in our last earnings call. Number one, ensuring quality care and positive health outcomes for all residents and patients in our properties. I cannot emphasize enough how important this is to us here at AHR. Number two, committing to strong operating performance through our hands-on asset management approach utilizing best-in-class regional operators. And number three, demonstrating prudent capital allocation to optimize our portfolio's earnings and intrinsic value, focusing on attractive risk-adjusted returns. Looking ahead, I'm excited to continue executing our plans alongside the entire AHR team to achieve further growth across our diversified healthcare portfolio. I will now turn it over to Gabe to discuss our operational results in further detail.

Gabe Willhite, Chief Operating Officer

Thanks, Danny. As Danny mentioned, we're thrilled to see robust levels of demand driving portfolio performance, particularly within our managed segments which accounts for approximately 60% of our pro-rata cash NOI. Within our managed segments, our integrated senior health campuses operated by Trilogy Health Services continue to set the standard for healthcare operations across all levels of long-term care, particularly assisted living and skilled nursing. And you can see this reflected in our 24.1% year-over-year same-store NOI growth within that segment in the second quarter of 2024 compared to the same period in 2023. Trilogy's unique model, purpose-built facilities and strong reputation have continued to drive demand. Occupancy continued its sequential gains in the second quarter with a 20-basis-point increase from the results in the first quarter of 2024, and occupancy continued its climb higher subsequent to the end of the second quarter with spot same-store occupancy as of July 26, 2024, at 87.4%. Skilled nursing occupancy, in particular, remains well above the industry average, although we've seen some seasonality return to that segment, albeit to a lesser extent than historic norms and not enough to offset gains in other areas. I'm also excited to see the benefits of Trilogy's moat, as I've explained to many in the past, playing out in the results. The unique model and regional scale allow resources to be allocated efficiently across our campuses, providing a stable foundation for further margin expansion with continued top-line growth and continued expense management which naturally ultimately leads to sustained NOI growth. Over the balance of 2024, with demand increasing for all care settings within the campus, skilled nursing assisted living and independent living, I expect our integrated senior health campuses occupancy to continue to grow. And of course, incremental occupancy gains would be expected to result in a higher pull-through to the bottom line. But again, because of Trilogy's unique business, we actually see multiple levers outside of occupancy growth for optimization and margin expansion beyond current levels. For example, as the operator of choice in its markets, Trilogy can focus on Q-mix and value-based care opportunities to provide for top-line growth completely independent of occupancy growth. Another example, Trilogy's industry-leading employee retention which we've seen improving steadily, provides an opportunity for further expense management. Trilogy is constantly improving the employee experience which allows them to eliminate the need for agency nursing completely long ago and reduces unnecessary overtime expenses and the weighted costs associated with employee turnover. Now that being said, Trilogy's biggest advantage by far is that Trilogy is known for its high-quality care and we wholeheartedly believe that people see value in that and when making a decision, continue to want their loved ones in a Trilogy facility. In our SHOP segment, we're achieving industry-leading levels of NOI growth by; one, partnering with best-in-class regional operators; and two, as a product of our work repositioning underperforming properties with new operators. Our same-store year-over-year SHOP NOI grew by 49.1% in the second quarter of 2024 compared to the second quarter of 2023, driven by approximately 700 basis points in occupancy gains compared to the second quarter of 2023 and also accelerating RevPOR growth above and beyond ExPOR growth. Furthermore, and as a credit to our hands-on asset management approach, we're pleased to report that same-store NOI margins for our SHOP segment expanded by 200 basis points from the prior quarter and exceeded 20% in Q2 2024. Similar to our integrated senior health campuses segment, occupancy in the SHOP segment is trending higher post-quarter end with spot same-store occupancy as of July 26, 2024, at 88.1%. At these levels, more options become available to our operating partners to drive investment performance and to support further NOI gains in the second half of 2024 and into 2025 and beyond. The strategy moving forward for the team and our operating group, in addition to delivering occupancy gains, will be to further optimize our pricing power where demand dictates and control expenses to deliver further margin expansion from current levels. I continue to believe that partnering with strong operators is the single most important factor driving successful senior housing investments. We are confident that our regional asset management approach during these results could be successfully expanded upon with other growth opportunities when the time is right and appropriate for us to grow externally.

Brian Peay, Chief Financial Officer

Thanks, Gabe. In the second quarter of 2024, we earned $0.33 per fully diluted share of normalized funds from operations, driven largely by 15.7% same-store net operating income growth across our combined portfolio. We are increasing our full year 2024 NFFO guidance to a range of $1.23 to $1.27 per fully diluted share, representing a $0.04 increase to the midpoint of earnings guidance. This upward revision is primarily due to the increased expectations for NOI growth in 2024 across our combined same-store portfolio of between 12% and 14%. We are also adjusting same-store guidance for our various segments for the full year 2024 as follows. We now expect our integrated senior health campuses segment to grow between 18% and 20%. In our SHOP segment, we now project 45% to 50% NOI growth in 2024. As Danny mentioned earlier, the pace at which demand increased among our managed care segments is a positive development, prompting the revisions to our total portfolio and segment level NOI guidance for 2024. In my mind, and as I've mentioned often, it was never a matter of if we would be able to achieve this level of performance, only a matter of when. And I'm glad that we are getting there faster than we had originally forecasted. Our guidance for outpatient medical and triple net leased segments remains unchanged. To remind everyone, we anticipate flat to slightly declining growth within outpatient medical and 1% to 3% growth within our triple-net leased properties in 2024. We expect stability from our outpatient medical segment where our team is actively managing tenant move-outs with incremental leasing in the back half of the year. More of the anticipated move-outs are expected to occur in the fourth quarter of 2024, but we anticipate healthy new leasing and re-leasing activity through the end of the year to partially offset those occupancy headwinds. Within our triple-net leased segment, we continue to see improving lease coverage levels for our tenants, with total triple-net leased EBITDAR coverage levels ticking up sequentially from 1.25x last quarter to 1.29x in the second quarter of 2024. The most meaningful improvement in segment rent coverage occurred for our skilled nursing and senior housing leased segments, currently at 1.34x and 1.11x EBITDAR coverage, respectively. With respect to full year NFFO guidance changes, the upside is being driven by significant same-store earnings growth in excess of previous expectations as well as some minor nonrecurring income this quarter with an ongoing offset from increased borrowing costs. In the quarter, we received approximately $1.8 million in nonrecurring recoveries from former tenants, resulting in slightly more than $0.01 per share increase to our Q2 2024 and full year earnings. I would not anticipate those amounts to repeat in subsequent quarters. Interest expense remains a headwind to earnings as we anticipate higher interest costs going forward from several factors. Asset sales are taking longer than originally anticipated, which means debt paydowns are delayed until later in the year. We financed a few lease buyouts at Trilogy utilizing debt, resulting in lower facility rent expense but higher interest costs, higher variable rate debt costs due to changes to short-term interest rate expectations as determined by the Fed, noncash interest expenses higher related to write-offs of previously unamortized loan fees, loan fees related to extending revolving lines of credit and GAAP above and below market rate debt adjustments. Although these amounts are showing up in earnings, they are noncash charges and do not affect cash flow from operations. Taking a look at our balance sheet, organic internal earnings growth has improved our net debt to annualized adjusted EBITDA ratio by 0.5 turn to 5.9x as of the end of the second quarter in 2024 as compared to 6.4x at the end of Q1 2024. Turning to our capital allocation activity. During Q2 2024, we exercised purchase options on three campuses within our integrated senior health campus segment, totaling approximately $46 million. These buildings carried a lease rate of approximately 9.1% and buying them out reduced our facility rent expense, enhanced segment level earnings and importantly, allowed us to gain control of the real estate underlying our operating assets. We are maintaining our disposition proceeds guidance with expectations to sell approximately $50 million of additional noncore properties for the remainder of the year, bringing full year 2024 sales proceeds to approximately $65 million. As previously stated, we continue to expose assets to the market to further recycle capital within our portfolio. We evaluate additional dispositions based on whether or not we are able to attain attractive pricing which in turn supports earnings and NAV accretion and further delevers the balance sheet or allows for modest external growth. Our approach to capital allocation remains measured and is aimed at maximizing value for all AHR stakeholders. That concludes our prepared remarks. And with that, operator, we are now ready to open the line for questions.

Operator, Operator

Our first question comes from Joshua Dennerlein from Bank of America.

Joshua Dennerlein, Analyst

I just wanted to kind of maybe touch base on Trilogy. It's kind of newer to the public markets. Just kind of how should we kind of think about the rate growth going forward from just all the different moving pieces? I know like CMS is moving rates and in different states. I guess any kind of insight into the go-forward if there's any certainty at this point?

Danny Prosky, President and CEO

Thanks, Josh. This is Danny and thanks for joining us. Good afternoon to you and I'm going to hand it over to Gabe for that one.

Gabe Willhite, Chief Operating Officer

Trilogy operates a business that combines senior housing and skilled nursing, with approximately 55% of their beds being skilled nursing and 45% senior housing, primarily assisted living with some independent living. In the assisted living and independent living segments, their rate growth aligns closely with competitors nationally. Trilogy is likely performing slightly better due to higher occupancy, giving them more pricing power, and they are recognized as a preferred choice in their markets. On the senior housing side, they experienced about 6.5% to 7% year-over-year rate growth, which we anticipate will continue. In skilled nursing, the revenue comes from a mix of private pay and other sources, with private pay resembling the dynamics of the assisted living and independent living segments. Trilogy has seen particularly strong growth in their skilled nursing rates, achieving a 9.3% year-over-year increase. The reimbursement environment with Medicare and Medicaid is also improving, helping to address the significant inflation we've seen over the past year and a half, particularly in compensation expenses. We expect a positive trend to persist. For Medicare, the final rule announced a national average increase of 4.2% for skilled nursing, but we anticipate that Trilogy’s markets will see a slightly higher increase due to rising labor costs. The Medicaid side is particularly intriguing, as the states where Trilogy operates are increasingly moving toward value-based care models. Here, higher quality care is rewarded with additional rate adjustments. Trilogy excels in metrics such as 5-star ratings, staffing quality, and low hospitalization rates for specific conditions, which is a significant reason we value our partnership with them. All of our operators maintain high standards, but Trilogy stands out for delivering exceptional care, and the reimbursement system is starting to acknowledge and incentivize this level of quality.

Joshua Dennerlein, Analyst

No, that's good color. Brian, you mentioned asset sales are taking a bit longer than you expected. Is there any kind of color you could provide on like what's driving that delay or...

Brian Peay, Chief Financial Officer

Yes. Good question. Actually, Stefan is on the front line of that. I'd actually like him to weigh in.

Stefan Oh, Chief Investment Officer

Thanks, Brian. Josh, yes, so in terms of what's delaying deals, I mean, I think it really is a matter of buyers are tending to be a little more careful about their diligence. They want to understand, for example, what's going on, on the CapEx level. So they're just digging in a little bit more on that end. And I think part of that is related to the lenders and what they're expecting as well on their side as far as the underwriting is concerned. So I think a little bit of it is a push down from the lenders. But I also think that in the market today where you've got a very limited amount of supply in terms of assets that are out there, especially on the MOB side or outpatient medical side, I think they are just being a little more careful about what they're buying and what they're paying for. And so I think that's what's delaying really some of the progress in terms of getting deals done.

Brian Peay, Chief Financial Officer

And Josh, oddly enough, we're not actually seeing a backup in pricing. So it's not as though cap rates are moving from where we were originally thinking we could get deals done. As Stefan described, it's really way more stringent due diligence probably brought on by lenders.

Austin Wurschmidt, Analyst

So for the integrated health campuses, Gabe, really appreciate all the detail you provided on that segment and some of these levers and opportunities that you highlighted, occupancy, Q-mix and expense management, I think were kind of the primary. What does this all kind of roll up and mean for the margin expansion potential over time? Can you just frame that up for us a little bit?

Gabe Willhite, Chief Operating Officer

We're very pleased with the progress we've made with the margins at Trilogy. Although we're still below our pre-COVID levels, we're getting closer each quarter, showing good movement. I believe we will eventually exceed those pre-COVID margins, although it may take some time. I anticipate higher occupancy rates, and we are already seeing better occupancy than before COVID, with expectations for continued improvement. We're benefiting from favorable reimbursement trends, particularly with Medicaid increasing at a solid pace. When the new Medicare rate starts on October 1, it will significantly assist Trilogy. Previously, Trilogy's margins were in the 19% range, and we're not too far from that level now. I expect us to surpass it.

Austin Wurschmidt, Analyst

Appreciate some of the thoughts there. And then just switching over maybe to the SHOP segment, you've alluded to exploring opportunities to grow that segment at the right time similar to the Oregon deal you did earlier this year. Any update or thought process around the opportunities that lie in front of you either with the existing operator base or new relationships?

Gabe Willhite, Chief Operating Officer

Yes. So good question. We've had a couple of opportunities that we've done over the last 1.5 years, mainly because of the positions we were in. We took over a portfolio in Texas, very pleased with, or the one in Oregon that you just mentioned. There is one more coming down the pipe which we really are not ready to disclose anything on it. If and when that deal closes, we'll disclose it at that point.

Brian Peay, Chief Financial Officer

There is a significant opportunity in the market, and we are witnessing some of our peers capitalize on that. We recognize those same opportunities and value our strong relationships with regional operators who are presenting us with deals. However, we are currently facing some capital constraints and are cautious about our leverage, which is now down to 5.9x. We want to protect that position. We hope that eventually, our stock will be revalued, allowing us to pursue external growth, but for the time being, we are being very selective.

Gabe Willhite, Chief Operating Officer

Yes. So we've closed on the deals that we've just discussed. We've been growing within Trilogy. We view Trilogy as our best risk-adjusted return today. So we've been kind of taking our limited capital dollars and really putting it towards Trilogy expansion.

Austin Wurschmidt, Analyst

Yes. That makes a lot of sense. But I guess on this one more SHOP opportunity, I mean a, I guess, what are the plans to fund it to the extent that it does materialize? And is this similar to those other opportunities you've highlighted where there's pretty significant NOI growth and occupancy upside?

Brian Peay, Chief Financial Officer

Yes. So we would be taking it over for the cost of the debt, so there'll be no new dollars going out the door. And we view it as a very opportunistic play with a lot of upside.

Ronald Kamdem, Analyst

Just two quick ones. So going back to Trilogy, I think following up on that line of questioning, I think you talked about potentially getting to record margins. Maybe can you talk about where you think the occupancy levels are at that point as well? Could you get to sort of the 90s? And also maybe just a quick update on the potential buyout. Obviously, the numbers have been accelerating, just how you're thinking about sort of the buyout and funding it.

Gabe Willhite, Chief Operating Officer

Trilogy's occupancy has improved significantly. Currently, the occupancy rates for assisted living and independent living are about the same, with assisted living catching up nicely. If we look back 18 months, after COVID, the skilled nursing side bounced back more quickly as we anticipated. I expect the assisted living and independent living side to potentially see faster growth now, although there's still room for growth in skilled nursing. However, Trilogy's skilled nursing model typically involves shorter stays, averaging under 30 days, as we primarily receive patients through hospital discharges. While there's potential for growth, our focus will remain on having available beds for new residents. For assisted living and independent living, I certainly believe there is room for growth, and I see no reason it wouldn't reach the 90s. This segment tends to be higher margin and likely to grow more rapidly in the long term. Regarding the buyout option, we have substantial flexibility with well over a year to make a decision, and we can approach it in various ways, including cash, preferred shares, or potentially common stock. We are very eager to exercise that option and own the entirety of Trilogy, aiming to benefit from the earnings growth associated with that transaction. It’s important to note that the price is fixed and will increase on January 1, so we are considering whether to proceed before or after that date. Regardless of when we finalize the deal, we believe Trilogy will create value under any circumstances. We aim to complete this efficiently. As Brian noted, we have successfully lowered our debt multiple to a comfortable level, and we want to avoid increasing it again without a chance to reduce it in the future.

Ronald Kamdem, Analyst

Great. That's helpful. And then look, my second question was just on flow through. Maybe you talked about the $0.04 raise in the guidance, $0.01 of that seemed like a nonrecurring. Maybe can you talk about the NOI upside, like how many pennies was that and what the interest cost offset on that was and how we think about flow through going forward?

Brian Peay, Chief Financial Officer

Yes. I mean, listen, we haven't broken it down to $0.01 for each segment raise or $0.01 for the interest. We are comfortable at the NFFO guidance for the year. The entire range of the guidance. Obviously, the midpoint is $1.25 but we put out the guidance because we're comfortable in that range, at least as of today. We may see things down the road. I mean, heck, there's been a lot of calls for a 50-basis-point decrease in interest rates from the Fed next month. And if that were to happen, then I think interest becomes a little bit less of a headwind. So we are comfortable with the range. We haven't really talked about pennies for each of the individual segment increases. As we get more visibility, as the year wears on, we can refine that guidance even more.

Michael Carroll, Analyst

Danny, can you talk a little bit about your investment pipeline? I know you mentioned that you're seeing some really good opportunities out there. I mean, with the improvement in the cost of capital that you've seen, specifically in the stock price over the past few months, I mean can AHR get more aggressive deploying capital and growing externally, possibly using new equity to fund some of those investments?

Danny Prosky, President and CEO

I don't want to get ahead of ourselves. Now that our lockup has expired, we have the option to return to the market. I'm not saying we're planning to do this month or next month. Currently, we have many opportunities; we have the third opportunity I mentioned that I hope will materialize soon. We've just started five new independent living developments within Trilogy and announced a new campus for Trilogy in Michigan. There are numerous growth opportunities for Trilogy, and as long as our capital is limited, we will likely focus more on that. We might consider a one-off deal with some of our regional operating partners, and I wouldn't be surprised to see something come from that. However, regarding significant investments in new acquisitions outside of Trilogy, our main priority is to expand Trilogy and acquire the remainder of it. That will likely be our primary focus before we start exploring other acquisitions. While opportunities exist and we would love to take advantage of them, we also need to be responsible with our capital.

Brian Peay, Chief Financial Officer

Investors spoke to us loud and clear during the IPO process of where they wanted to see our leverage. Partly that's because it makes the equity trade better, partly because it will allow us to take advantage of external growth opportunities out in the future once we find things that are going to meet our return requirements. And so to the extent that the stock continues to rerate, the multiple goes up, I think those opportunities become more and more attractive. But we're very cognizant of where our leverage multiple is.

Michael Carroll, Analyst

Okay, great. Regarding Trilogy, they have achieved impressive results over the past several quarters and even years. There have been some leadership transitions, particularly with David being promoted to President and CFO, so congratulations to David. Can you provide some insight into this leadership shift? What opportunities does this create for Trilogy? Will they be able to expand more aggressively, or is this more about recognizing David's contributions?

Danny Prosky, President and CEO

I wouldn't read too much into that. It's not really a change in leadership. Leigh Ann has been the CEO for about 5 or 6 years, having taken over for Randy Bufford, the founder, when he retired in 2019. She has been with the company for over 20 years and was a long-time COO. She isn't looking to make any changes in her career. David has served as CFO for several years, around 6 or 7. Both of them are doing an excellent job, as reflected in the results. We have great respect for both David and Leigh Ann. This is really just an upgraded title for David. He has taken on more responsibilities as CFO, particularly related to the ancillary business side of the company. So I don't think you should read too much into that adjustment in title.

Michael Griffin, Analyst

Gabe, I want to go back to your comments just on seasonality within Trilogy and just given where kind of occupancy expectations are there. You called out a lot of the stay on the SNF side, a sort of shorter-term rehab stay. So is it fair to assume that occupancy is going to fluctuate in the near term? Or do you still expect kind of the sustained increase to happen over the next few quarters?

Gabe Willhite, Chief Operating Officer

It's a good question. And I think the hard part about where we're at right now in this kind of pre-COVID world in senior housing and skilled nursing is that it's really difficult to project how quickly things are going to move. So I think that what the question actually is, is about what could stop growth from happening? And right now, from my seat, sure, there's a little bit of seasonality in skilled nursing. But like I said, it's probably less than half of what we see in a traditional pre-COVID year, right? So what could really disrupt kind of this long-term run rate we're on, that I think is at least 2 or 3 years, is new supply, obviously. We don't see that coming, especially in skilled nursing, where the number of units in America continues to decline, not increase. And on the AL side of Trilogy's business, we're not seeing any construction starts. It's at historic lows, I think even below where we were during the global financial crisis. So if supply is not picking up, the only other lever there is, is really the demand. And on the skilled side, you see demand kind of go down a little bit with seasonality, I think, mainly driven by the flu. And so that's normal. I don't think it's too concerning at this point that we are seeing a little bit of seasonality in the skilled line of that business because we're seeing accelerating growth in their assisted living part of the business. And by the way, that's part of why we think Trilogy is an attractive platform, because the entire business has a different risk profile when you've got these different drivers of demand by including them all in one campus, IL, AL and skilled nursing, right? So it's always been at Trilogy, the AL summer selling season is really positive and the skilled nursing occupancy has some seasonality to it. And the reverse is also true in the winter months where the skilled occupancy picks up and maybe AL drops off a little bit.

Danny Prosky, President and CEO

Yes. And remember, Trilogy also has the ability to transition wings if demand is up or down for any particular service. If there's a demand for AL memory care, they can convert a wing very easily. If they need additional SNF beds, as long as they've got the licenses for it, they can convert into additional SNF beds. So they've got flexibility there based on the demand for the different lines of business.

Gabe Willhite, Chief Operating Officer

And then one more point I want to make on this to you is occupancy is not the end-all, be-all for Trilogy NOI growth. you can see how even sequentially in the quarter, Trilogy's optimized Q-mix in order to grow NOI pretty substantially but you're not seeing huge moves in occupancy. And that's by design, right? You can optimize the business in ways that help you to grow the NOI without necessarily pushing occupancy to the limit. And I think you're going to start to see that happen in the SHOP world as well, right? As people focus more on what's a rate that can get me back to a pre-pandemic margin, they may be willing to decelerate the growth in occupancy in exchange for a rate that's more profitable.

Danny Prosky, President and CEO

Yes. So Trilogy can take more Medicare and less Medicare Advantage. They can take lower acuity Medicare residents where their daily rate may actually be a little bit lower but the margin is much higher just because there's a lower level of care. So there's all kinds of things they can do to move the needle without just simply growing their skilled census.

Michael Carroll, Analyst

That's great. I appreciate all the color you guys gave there. And then maybe just some updated thoughts around the dividend. Obviously, the payout ratio looked like it improved about sub 90% this quarter. I know that the CapEx can be kind of lumpy on a quarterly basis. But if I think back to the IPO, I mean the expectation was for about 100% payout ratio for '24. Has anything changed? And could we see that payout ratio on a full-year basis kind of come inside of that, maybe into the low to mid-90s?

Brian Peay, Chief Financial Officer

Yes, that's definitely possible. If we focus on the capital expenditure for Q2 and include the noncash interest expense, our adjusted funds from operations payout ratio was around 90%. What has changed from our initial discussion is that occupancy has increased more quickly than we expected. The mix at Trilogy is very advantageous. There is still a lot of time left this year. I would describe our earnings growth expectations and the guidance we've provided as somewhat aspirational, meaning we cannot just take a break and expect those numbers to materialize. We have work to do to achieve those goals. If everything goes as we project, there is a chance we could cover the dividend, although it may not meet the level we would prefer. We have indicated that we are aiming for a stronger coverage. We believe that the organic earnings growth within the portfolio could help us reach that potentially in 2025. However, I think there's a likelihood we will end up below a 100% payout ratio this year.

John Pawlowski, Analyst

Just two questions from me on the SHOP portfolio. The 3.1% RevPOR growth year-over-year in the quarter, are concessions still weighing down that number? Or is that kind of the clean results we should expect as a reasonable run rate moving forward?

Danny Prosky, President and CEO

Yes, I believe there are fewer concessions now. If we look back to the last earnings call, we indicated that we expect RevPOR growth to accelerate throughout the year. We've certainly seen that from Q1 to Q2. While I hesitate to make forward-looking statements, I expect the acceleration to continue for the remainder of the year.

Brian Peay, Chief Financial Officer

And that's the benefit of occupancy, where it is. I think at that point, you can be a little bit more strict on concessions and not handing them out. You can certainly push on street rates. And that's the benefit of having occupancy up where it is. If you're trying to build occupancy and raise RevPOR at the same time, it becomes much more difficult. And now that you've got a critical mass of occupancy, you can push on rate.

John Pawlowski, Analyst

I would like to revisit your comments regarding capital expenditures. I understand that there is seasonality and variability in CapEx, but it has significantly increased year-over-year compared to Q2 of 2023 in your SHOP portfolio. Could you clarify how long we should anticipate above-trend CapEx figures as you potentially utilize some of the deferred CapEx that was not spent during COVID?

Brian Peay, Chief Financial Officer

It's a valid question, John. The truth is that we experience seasonality in our capital expenditures, which might sound unusual, but several of our assets are located in cold weather regions. It becomes quite challenging to replace roofs or resurface parking lots when there is snow present. In fact, our spending in the second quarter is higher than in the first quarter. However, if you review the capital expenditures over the last four quarters for each segment we've provided guidance on, those amounts align closely with what we've forecasted. Specifically, for Trilogy, we guided about $900 to $1,000 per bed, and the trailing four-quarter figure stands at $1,032, which is right in line with our expectations. On the SHOP side, the trailing four-quarter average is about $1,100 per bed, matching our guidance range of $1,000 to $1,100. Therefore, I would note that the capital expenditure is mainly influenced by a couple of factors: first, the weather, and secondly, changes in operators. In scenarios where we're replacing operators, we may hold back on spending until the new operators are settled in. Once they have been in place for a while, that is when we start to allocate capital according to their needs. So, while there may seem to be an increase, it's not due to any deferred maintenance. Overall, capital expenditures are tracking closely with our expectations.

Danny Prosky, President and CEO

Yes, the difference between Q2 last year and Q2 this year was that we had many operator transitions last year. During those transitions, we limited our capital expenditures as we waited for the new operators to come in and assess what was needed. So, if I'm correct, Brian, I believe Q2 2024 will be a catch-up quarter since we had lower spending in the previous quarters while transitioning operators. We had significant spending in Q2, but I don't anticipate that level of expenditure to continue consistently in the future.

Brian Peay, Chief Financial Officer

Yes, it's related to the weather, and the new operators are now guiding our capital expenditure. However, I can guarantee that it will not be $3,500 per bed for 2024. It will be closer to $1,000 to $1,100 per bed.

Operator, Operator

There are no further questions. Danny Prosky, I'll turn the call back over to you.

Danny Prosky, President and CEO

Thanks, Jack. I appreciate it. And everybody on the call, I want to thank you for your time and your interest. It's been a great six months since we concluded our IPO. And we're looking forward to continued improvement in our portfolio here at American Healthcare REIT. So have a great rest of the week, everybody, and we'll talk to you soon.

Operator, Operator

The meeting has now concluded. You may now disconnect.