American Healthcare REIT Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2025

Key Takeaways

  • Positive Sentiment: Strong Q2 performance with 13.9% total portfolio same store NOI growth and raised full-year guidance to $1.64–$1.68 NFFO per share and 11%–14% same store NOI growth.
  • Positive Sentiment: Completed $255 million of acquisitions year-to-date and maintains a $300 million+ pipeline of high-quality seniors housing assets under RIDEA structures.
  • Positive Sentiment: Improved leverage with net debt to EBITDA down to 3.7x (from 4.5x) and raised $204.3 million via ATM sales plus $127.8 million in forward ATM settlements.
  • Positive Sentiment: Trilogy segment drove occupancy to 88.9%, ADR up 7.8%, and increased Medicare Advantage mix to 7.2% of resident days, supporting margin expansion.
  • Neutral Sentiment: AHR earned Great Place to Work certification, underscoring its focus on employee engagement and culture.
AI Generated. May Contain Errors.
Earnings Conference Call
American Healthcare REIT Q2 2025
00:00 / 00:00

There are 11 speakers on the call.

Operator

Thank you for standing by, and welcome to the American Healthcare REIT Second Quarter twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I'd now like to turn the call over to Alan Peterson, Vice President of Investor Relations and Finance.

Operator

You may begin.

Speaker 1

Good morning. Thank you for joining us for American Healthcare REIT's second quarter twenty twenty five earnings conference call. With me today are Danny Prostke, President and CEO Gabe Wilhite, Chief Operating Officer Stephane Oh, Chief Investment Officer and Brian Pei, Chief Financial Officer. On today's call, Danny, Gabe, Stephane, 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.

Speaker 1

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, 08/08/2025, or such other dates as may otherwise be specified.

Speaker 1

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 in the Investor Relations section of our website at www.americanhealthcarereit.com.

Speaker 1

With that, I'll turn the call over to our President and CEO, Danny Prostke.

Speaker 2

Thank you, Alan. Good morning or good afternoon, everyone, and thank you for joining us on today's call. We are excited to report another very strong quarter for AHR. We continue to make meaningful progress across our portfolio with outsized organic earnings growth, accretive acquisitions and disciplined capital markets activity. All of this is supported, of course, by the continuing strong business fundamentals across the entire seniors housing industry.

Speaker 2

The two main points regarding our business that I would continue to emphasize are as follows. Number one, it is imperative that we here at AHR continue to stress to our operating partners that our number one commitment here at the company is a continued focus on quality resident care and high quality health outcomes. We firmly believe that emphasizing patient care as well as employee satisfaction at the facility level will allow us to continue to provide strong financial results for our shareholders. And two, although the past couple of years have allowed our industry to perform well financially across the board due to a very favorable operating environment, we believe that we are in the early innings of a multiyear secular trend of ongoing improvements of operating metrics throughout the industry with rising occupancies, RevPAR, margins and net operating income. We expect the mismatch between supply and demand within the managed long term care segments to remain favorable for the foreseeable future.

Speaker 2

These strong results would of course not be possible without the hard work of our AHR team members and our operating partners. I And thank them for the energy that they bring each day into all facets of our business. Now let's jump in. During the second quarter, we delivered another quarter of strong performance led by our operating portfolio, which is comprised of our integrated senior health campuses, also known as Trilogy, and our SHOP segments. We delivered 13.9% total portfolio same store NOI growth in the 2025 compared to the same period in 2024.

Speaker 2

And from our operating initiatives, where we continue to optimize the various levers in our control, we expect to capture more of this robust demand to drive double digit total portfolio same store NOI growth for the remainder of the year. On the capital allocation front, we have been complementing our strong organic growth with successful execution of new investments with approximately $255,000,000 of acquisitions closed on so far this year. You may recall that during our first quarter earnings call, I noted that we had well over $300,000,000 of high quality seniors housing assets in our pipeline. I'm excited to report that we have already closed on approximately $174,000,000 of properties that were part of that group since our last earnings call. I would also like to congratulate our investments team for continuing to build out our pipeline to the point where we still have well over $300,000,000 of awarded deals in our pipeline.

Speaker 2

Our acquisition focus remains on high quality long term care assets that will be owned under a RIDEA structure. Additionally, we have been diligent and measured in our capital markets activity by sourcing attractively priced equity capital, which allows us to preserve optionality to continue pursuing further growth without relying on only one capital source. This is evidenced by the improvements we've seen in our leverage metrics with net debt to EBITDA, which stands at 3.7 times at the end of the second quarter. I'll remind everyone on the call that the same ratio stood at 4.5 times on March 31. Finally, before I turn it over to the team, I'd like to take a moment to acknowledge that AHR has been awarded the Great Place to Work certification by Great Place to Work, the global authority in workplace culture.

Speaker 2

I am grateful that our mission of high quality care and outcomes is shared by all of our team members and that our work provides meaning for our employees. All of our recent and future successes are owed to the AHR team members. And again, I want to thank you all for cultivating the purpose oriented culture here at the company that has led to this recognition, which I know is only a small symbol of what we continue to build together. With that, I'll turn it over to Gabe to walk through our operational results in more detail.

Speaker 3

Thanks, Danny. Q2 was another strong quarter operationally. As Danny mentioned, our total same store NOI increased 13.9% year over year with particularly strong results in Trilogy and in SHOP. Starting with Trilogy, we saw same store NOI growth of 18.3% year over year, which was supported by broad based improvements in occupancy and rate growth without compromising the focus on managing expenses. Occupancy climbed to 88.9%, a two nineteen basis point increase over the prior year with average daily rates across all payors growing by 7.8% year over year.

Speaker 3

That growth was aided by Trilogy's comprehensive revenue management program and continuous focus on improving quality mix. Within Trilogy, we're seeing growth across both skilled and senior living lines. And as I've mentioned before, the story of Trilogy's growth is not just limited to simply one component of revenue. As we look across some of the key drivers, I'd like to highlight that Trilogy's high quality of care continues to be recognized by Medicare Advantage plans and their enrollees contributing to an increase in concentration with Medicare Advantage now making up 7.2% of resident days compared to 5.8% a year ago. Given that Trilogy has a portfolio wide overall CMS rating of over four stars compared to the national average of below three stars, I'd anticipate that Trilogy will continue to be a highly sought after post acute care provider.

Speaker 3

Beyond the payers, we're also seeing strong tour volumes and observing a rise in internal referrals between care settings, which continues to support length of stay and improve margins that stand to benefit from more operating leverage at current levels. In short, Trilogy continues to execute on multiple fronts, further establishing themselves as a top operator in America. In shop, the momentum continues. Same store NOI was up 23% year over year and while average same store occupancy appears flat from Q1 to Q2, occupancy was actually ramping and increasing through the quarter rebounding from the impacts that the heavier winter flu season brought in Q1. In fact, throughout the second quarter, we realized the highest level of move in activity we've seen in our SHOP segment in years and maybe even ever.

Speaker 3

And at the end of the second quarter SHOP spot same store occupancy was north of 87.5%. These occupancy gains are also being accomplished while remaining proactive in our pricing strategies which resulted in RevPOR accelerating in Q2 with growth of 6.6% compared to the same quarter last year. Similar to Trilogy, our SHOP portfolio stands to benefit from operating leverage embedded at this occupancy and current same store NOI margin, which is now above 20%. It's important to point out that our SHOP performance is a testament to our operating partners' ability to execute with the support of our active asset management team and our platform. We're continually refining our operating platform capabilities by leveraging expertise across our operators, particularly Trilogy.

Speaker 3

We've done this by improving best in class regional benchmarking tools and resources across our operating portfolio and the various operators allowing for better pricing discipline, wage monitoring and expense management. As we move into the second half of the year, we continue to see a compelling backdrop. Outsized levels of demand paired with anemic levels of supply growth and low construction starts suggest that we should continue to benefit from a multiyear tailwind of favorable operating fundamentals. With our operating portfolio now accounting for approximately 75% of our total NOI and growing, we believe we've positioned ourselves favorably to continue delivering strong NOI growth across our diversified healthcare portfolio. Now I'll turn it over to Stephane to discuss our recent investments activity.

Speaker 4

Thanks Gabe. Our capital deployment strategy remains consistent. We're focused on accretive investments in settings and with operators where we have long term conviction. That means pursuing opportunities where we already have relationships or have deliberately evaluated new ones, where we understand the local care dynamics and where our capital can facilitate positive long term clinical and financial outcomes. We are excited to announce that following quarter end, we formally established a new regional operator relationship with one of the two groups previously mentioned, an organization we've identified as aligned with our long term strategy for the SHOP segment.

Speaker 4

The operator is Great Lakes Management, a premier senior living operator focused in Minnesota and other areas of the Midwest. We are very excited to grow with them across our target markets and appreciate the diligence they've shown throughout the partnership process. Now I'll walk through some of our recent activity in more detail. During the second quarter, we closed a previously announced $65,000,000 SHOP acquisition in Virginia. Upon closing the acquisition, we transitioned operations to one of our trusted regional operating partners, Heritage Senior Living.

Speaker 4

Subsequent to quarter end, we closed several transactions that brought our year to date acquisition volume to approximately $255,000,000 all within our operating portfolio segments. In SHOP, this included two new acquisitions totaling approximately $33,500,000 while in our Trilogy segment, closed on four senior housing properties already managed by Trilogy for approximately $65,300,000 and the acquisition of our partner's 51% interest in five Trilogy operated campuses held in an unconsolidated joint venture for approximately $118,000,000, which included the extinguishment of high interest rate partnership level debt. The campuses held in the joint venture were recently developed and are not yet stabilized, but we believe they are well located and positioned to deliver solid risk adjusted returns. By increasing our exposure now, we secure long term upside and expect more accretive growth within our Trilogy segment. On the capital recycling front, we closed on $33,500,000 in dispositions during Q2.

Speaker 4

As we've noted before, we expect outpatient medical dispositions to continue as we prioritize growth in our operating portfolio. Looking forward, we've continued to add to our investment pipeline in the last few months with newly awarded deals. Despite closing approximately $174,000,000 since our last call, our pipeline remains robust with well over $300,000,000 of investments, most of which we expect to close by year end. None of these transactions are included in our revised guidance due to timing uncertainty. However, this underscores the embedded upside we believe we may benefit from in the future.

Speaker 4

We remain active in pursuing further external growth opportunities as the market continues to offer attractive pricing, particularly for well capitalized buyers like ourselves. With that, I'll turn it over to Brian.

Speaker 5

Thanks, Stephane. For the 2025, we reported normalized FFO of $0.42 per fully diluted share, which equates to a 27% year over year increase in NFFO per share as compared to Q2 twenty twenty four. Our strong organic growth, select acquisitions and capital markets initiatives have assisted us in further decreasing the company's leverage and building capacity for future growth. Our net debt to EBITDA stood at 3.7 times at the end of the second quarter, driven by strong earnings growth, which creates retained earnings and proceeds from sales of stock through our ATM program. During and subsequent to the quarter, we raised $204,300,000 through direct ATM sales at an average price of $34.72 Additionally, we settled sales under $127,800,000 forward ATM agreement in early July at an average price of $35.96 We remain nimble in our approach to the capital markets and were able to lock in attractively priced equity proceeds to assist us with our funding obligations or accretive investments in our growing acquisitions pipeline and previously announced development funding.

Speaker 5

Given our strong year to date performance and improved visibility into the second half, we are raising our full year 2025 NFFO per share guidance to a range of $1.64 to $1.68 up from a previous range of $1.58 to $1.64 Our revised guidance does not assume any additional acquisitions or capital markets activity beyond what we disclosed in yesterday's press release, nor does it include any deals from our awarded pipeline. This increase is primarily driven by the strong organic growth in our portfolio. As such, we are also increasing our total portfolio same store NOI growth guidance to a range of 11% to 14, up 150 basis points at the midpoint from the previous range of 9% to 13%. Segment level same store NOI growth guidance updates are as follows: Integrated Senior Health campuses increased to a range of 15% to 19%, reflecting continued strength at Trilogy SHOP remains unchanged at 20% to 24% Outpatient Medical increased and tightened to 1% to 1.5% from a prior range of negative 1% to positive 1%. Triple net lease properties increased and narrowed to negative 75 basis points to negative 25 basis points from negative 1.5% to negative 50 basis points.

Speaker 5

We believe our current outlook appropriately reflects the strength of our portfolio, led by our operating portfolio segments, the quality of our operator partnerships and the visibility we have over the remainder of twenty twenty five. With that, operator, we'll open the line for questions.

Operator

Thank you. We will now begin the question and answer Your first question comes from the line of Ronald Kamdem from Morgan Stanley. Your line is open. Hi, Ron.

Speaker 6

Hey, great. Just the opening comments, sort of mentioned that just here in the early innings of sort of this demand tailwind, and I was hoping we could sort of double click on that. When you're thinking about sort of the Trilogy portfolio as well as the SHOP portfolio, Just in your mind, what is peak occupancy? And what do you think pricing can do when you get there again to maintain these innings as you sort of mentioned in your opening comments? Thanks.

Speaker 2

Well, first and foremost, I'd say that we feel very confident that we're in the early innings just because of the demographics, right? Everybody on this call already understands that. We've got the baby boomers start turning 80 next year. We have a fifteen year period of extremely rapid growth in that over 80 cohort, which is kind of where we see most of the demand for long term care. And over the last six, seven years, we've seen very little as far as construction starts.

Speaker 2

And we're not seeing that pickup anytime soon. So maybe construction starts to pick up next year or the year after, and then it's two, three years before new facilities start to open. But it seems like every year, we're going to fall further and further behind from a supply demand perspective. So overall, we feel very good about the direction we're going in. As far as peak occupancy, it's really we can grow our occupancy very rapidly, Ron.

Speaker 2

Truly, she could start accepting Medicaid residents and fill up their skilled very, very fast, and we could start cutting rate and filling up our senior housing facilities in much faster pace. So, you know, it's not just a function of, you know, how fast, you know, we expect to grow occupancy. Our we expect it will continue to go grow up. We want to continue to be disciplined as far as the rates that we're getting. And you can see we had really strong report growth across both SHOP and Trilogy.

Speaker 2

I don't see we got used to kind of mid to high eighties as being the standard over the last few years just because of a lot of supply being built. In my mind, mid-90s, I think, is where we're headed. And could it be higher than that? It could, depending on what you're willing to do as far as pricing. But we think there's still a lot of room.

Speaker 2

And so you've got occupancy growth. And the higher occupancy, the easier it is to continue to grow RevPOR at a faster clip than ExPOR. About onethree of our assets are what we call fully occupied, kind of 95% and up. And we're still growing, our NOI at a nice clip of those assets by disciplined revenue mix and expense control. So we've got a long way to go.

Speaker 6

Helpful. And then if I could just ask a quick follow-up on the acquisitions. Just can you talk a little bit more about sort of the deals closed, the assets in the pipeline? Just what sort of occupancy level? What sort of upside is sort of baked in or underwritten in those?

Speaker 6

Thanks so much.

Speaker 2

So I'll start and then I'll hand it over to Stephane. As we said on the last call, we're focusing on RIDEA, SHOP and Centrilogy as well. We're looking to really not just grow our asset base, but to improve the overall quality. So if you look at the assets we sold, whether it's on the outpatient medical, and we did sell a few select long term care facilities, we tend to sell kind of smaller, older buildings. And what we're focusing on in the pipeline is really larger, newer, higher you know, nothing wrong with the quality we have, but we wanna continue to build on that.

Speaker 2

So, the average age is quite new. You know, what we just know, the the two portfolios we closed on at at Trilogy, most of those have been built in the last five years. Some of them have only recently opened in the last twelve months. If you look at what we talked about a pipeline north of $300,000,000 today, that is except for one asset that's at Trilogy, that's a lease buyout, 100% of that is SHOP. So that's really what we're focusing on.

Speaker 2

Stephane, maybe you want to talk a little bit about what we closed, what's in the pipeline. We kind of have a mix of stabilized and unstabilized. So why don't you kind of talk about what we're buying?

Speaker 4

Yes. Sure. And, yes, I would say, first of all, we're very pleased with where we're at in terms of what we've closed and the pipeline we've built. It I would just recognize that our investment team has done a really good job. Trilogy and the AM teams are also really key component to us being able to do what we've done so far this year.

Speaker 4

So it's been a real team effort, I think what we're coming up with in terms of the assets we've closed on and what we have in the pipeline is something that we're gonna be very pleased with over the course of the long term. These are high quality assets, like Dan said. A lot of them are newer, modern assets that we think are a great fit for the market, but also a great fit for the operators that we have engaged to to manage them. You know, a lot of The focus here is really higher acuity. We want to continue to be focused on assisted living, memory care.

Speaker 4

There is some IL, particularly in some of the assets that we've already closed. But I think what you'll tend to see is that most of it is, going to be focused on the memory care and assisted living area. You know, I think IL, if you look at between what what we've closed in 2025 and and in our pipeline, we are, you know, probably 15 to 20% IL only. Price per unit on these buildings, I think, are well below replacement cost. We're looking at somewhere around, you know, mid to high 200 thousands for the portfolio that we're we've closed on and also on what's in the pipeline.

Speaker 4

And as far as where yields are for us, I think as Dan mentioned, you can bifurcate it between the stabilized assets that we have and the ones that maybe still in pre stabilization or maybe there's some light value add there. But at the end of

Speaker 2

the

Speaker 4

day, we think all the categories are going to be stabilizing in the high sevens to eights with year one yields ranging on the stabilized assets somewhere in the low sixes and the other assets are ranging in I'm sorry, in the pipeline low low 6s, the stabilized assets and then the value add pre stabilized assets, probably something a little bit lower than that. But overall, we think those are going perform really well.

Speaker 6

Super helpful. Thanks so much.

Operator

Your next question comes from the line of Austin Wurschmidt from KeyBanc. Your line is open.

Speaker 2

Hi, Austin.

Speaker 7

Hey, everybody, and good morning out there. So the ADR growth this quarter really stood out, and I'm just wondering if this was a glimpse of some of the recent moves taken around expanding the Medicare Advantage piece of the business and just your ability to shift mix of residents around? Should we expect that, that benefit in 2Q carries into the back half of the year as well from a rate growth perspective?

Speaker 2

You want me to start with that

Speaker 3

one, Gabe? Want to take it? Sure.

Speaker 2

Yes. Yes, clearly, the rate growth at Trilogy has been strong. And it's a combination of a few things. But a, the quality mix continues to improve, right? If you look at the percentage of Medicaid, it has ticked down pretty consistently each quarter.

Operator

That being said, it's not

Speaker 2

just an issue of quality mix. There's what I call kind of quality mix within the quality mix, right? So clearly, highest revenue residents we're seeing are Medicare and Medicare Advantage. But even within Medicare Advantage, we have different contracts with different rates. And you may keep your Medicare Advantage percentage static, but your average daily rate could increase significantly by focusing really on those contracts that pay you a higher rate.

Speaker 2

And as Trilogy, because of the high quality outcomes that they achieve, because of the good quality care, they continue to grow their Medicare Advantage admissions. And they're able to focus on those that where they get a higher rate. That's been Gabe can talk about it some more, that's one of the things that they focus on very heavily is their mix and and and kind of what we're looking to to to to help bring into the rest of our shop portfolio even though those don't have a skill component.

Speaker 3

Yeah. And this is Gabe. I think I would add to that. This this might be the single most misunderstood component of our entire business is that because Trilogy has a big component of their revenue coming from government reimbursement that that growth rate is gonna be somehow tied to an inflationary measure. And we've said for several quarters now in a row that Trilogy has multiple levers to pull on to grow, not just, NOI, but top line revenue through, quality mix and also the contracts that Danny is talking about with Medicare Advantage.

Speaker 3

That's probably been the biggest shift in the last year is, once you get to these higher levels of occupancies, you have a lot more options on which pay or source you prefer and you have a lot more bargaining power with the Medicare Advantage plans that you're doing contracts with, which contracts are, as you know, priced off of a Medicare rate and a discount to the Medicare rate. So to the extent you can narrow that discount, can grow revenue on an average daily rate better than the announced Medicare rate. All that is to say, Austin, it's really hard to predict the exact percentage that it's going to grow. I do think it's fair to assume it's going to grow faster than inflation as they continue to optimize the mix. But can we continue to see 9.2%?

Speaker 3

That's a very impressive number. We're very impressed by the Trilogy team being able to capture that. And it's obviously a large part due to optimizing the mix.

Speaker 2

And we didn't even talk about quality add ons, which contributed to that as well.

Speaker 7

Yes. No, certainly that falls into all the levers. But just focusing specifically, mean, last quarter, the team did highlight if Trilogy outperforms, Med Advantage would probably be a part of that. And so I guess quite freshen on your part. But you also mentioned you're looking at new Medicare Advantage plans, not currently contracting with Trilogy.

Speaker 7

So anything in

Speaker 2

the near term pipeline to further expand those relationships and continue to drive that shift in mix to the higher rated segments? I would say there are always new and changes within Medicare Advantage. And it's not just new contracts, it's adjustments to existing contracts. So for example, if Trilogy has a contract that they're less excited about and they start accepting fewer patients from that source because they don't need to because they've got higher, you know, better contracts that they're accepting, then you're gonna see that that that particular provider have to renegotiate with Trilogy because they want access to Trilogy's facilities. The the patients wanna be in a Trilogy building.

Speaker 2

So it it's it's constantly changing and evolving.

Speaker 7

And and then just if I can sneak one more just along the same lines. I mean, much higher are these newer contracted rates versus, you know, historically, what that rate has looked like? And that's it for me. Thank you.

Speaker 2

As you can imagine, you know, we have we're very limited as far as you know, the last thing these insurers want is for us to be telling people what their contracted amount is. You know, I think that, obviously, our goal is to have as little of a discount to the standard Medicare rate as possible. And I would say that the more recent contracts have been at a much higher percentage because of everything that Gabe and I just said.

Speaker 5

Think Austin, this is Brian. I would sort of add to that. Just an interesting aspect. If you look on Page six of the supplemental, you can see that on a percentage basis, the Medicare Advantage is increasing. So it went from five point eight percent of the resident days to 7.2 And really where they're sort of cannibalizing that the other care levels or excuse me, the other payers would be private and Medicaid.

Speaker 5

And what's interesting is that the Medicare Advantage rate is actually seventy nine percent higher than Medicaid and 42% higher than private pay. So that's sort of another way to think about it is instead of necessarily against the other Medicare Advantage, it's more what are we replacing our residents with much more Medicare Advantage residents than they are private or Medicaid.

Speaker 7

Yes. That's all really helpful. Thanks for the time.

Operator

Your next question comes from the line of Michael Carroll from RBC Capital Markets. Your line is open.

Speaker 2

Hi, Mike.

Operator

Hey, thanks. I wanted to kind

Speaker 2

of circle back on this Medicare Advantage discussion. When did these Medicare Advantage payers start to get more aggressive pursuing partners that can provide these better outcomes like Trilogy? Is this more of a recent phenomenon over the past few quarters? Or has it been going on for the past few years?

Speaker 3

It's accelerated. Mike, it's Gabe. So I think in last fall, when you saw the star ratings for some big Medicare Advantage plans take a hit because those star ratings are based on the quality of the plan and access for enrollees to the highest quality of care providers is where I started to notice it tick up a bit. Yep. But it's I think it's been happening for longer than that.

Speaker 3

And, the the interesting thing about those contracts is they're very fragmented. There's a lot of different contracts out there. Yes. There are bigger players that move the needle. But because they're so fragmented and there's different pricing associated with all those different plans, like Danny said earlier, it you might not need to renegotiate a Medicare Advantage contract in order to capture a higher rate.

Speaker 3

You may just be able to prioritize people that are on a higher paying plan when you've got, admission flexibility. And when you've got higher occupancies, you have more admission flexibility and you can prioritize the highest reimbursement source.

Speaker 2

And then I guess it did sound like in your prepared remarks and you're asking a few questions, Gabe. I guess how big is that pipeline of those discussions going on with these plans? I mean are there more contracts in the hopper that Trilogy can execute on and continue to drive that skill mix or that Medicare Advantage mix higher? I mean, is there like, could we think about that expanding with 100 basis points a year? Is that kind of like a fair estimate if Trilogy is still able to provide these outcomes and win these contracts?

Speaker 2

It's hard to say because it takes two to tango, right? I mean Trilogy has always been very careful as far I mean, they've passed on a lot of contracts because they didn't like the rate. Mhmm. And in many instances, they would they would end up having to, you know, negotiate out of network for each resident, which which which would end up costing the insurer quite a bit more, which is why they finally come to the table and work with Trilogy at a rate that works. And they've got some contracts that are not for the entire company, but maybe state specific or region specific.

Speaker 2

So it seems it's it seems to me, and I think everybody would agree, that Trilogy's bargaining position continues to strengthen over time for the reasons that Gabe mentioned a little just a few minutes ago. Okay. Great. Appreciate it, guys.

Operator

Your next question comes from the line of Farrell Grant from Bank of America. Your line is open. Hi, Farrell.

Speaker 8

Hi. Thank you so much for taking my question. I wanted to circle back on the occupancy comments. I know, Gabe, you kind of outlined a little bit about acceleration through the quarter. I was wondering if you could give a little bit more detail as well as either commentary on expectations for the increased move ins, of what you're seeing today.

Speaker 3

Yeah. Sure. So today, we're higher than where we ended Q1. I told you spot occupancy at the end of Q1 was 87.5%. So we see continued ramping there and a good summer selling season.

Speaker 3

I think, at the you know, as Danny said, the top third of our SHOP portfolio is pretty highly occupied. So the one thing I want to remind everybody is we're not gonna give away occupancy just so that we can report a high number. We're looking at the total impact of the business. And that includes looking at what the rate is, what the street rate is, what you're paying for referral fees, what community fees you're charging. So it's not we're not looking at at it myopically, like, let's just drive occupancy to the highest point we can this summer.

Speaker 3

We're looking at it as let's grow occupancy steadily with the right rate to make sure that we've got a prolonged period of NOI growth. Farrell, that being said,

Speaker 2

just to clarify, as Gabe mentioned, in the second quarter, our occupancy peaked at the end of the quarter on June 30 at 87.5%, which is certainly higher than what we saw on average for the quarter. And today, that occupancy is definitely higher than that. So June and July have been very strong selling months within AL and IL. And our expectation is that, that will continue. So I'm looking forward to seeing more occupancy at the end of this quarter.

Speaker 8

Okay. Thank you. That's very helpful. And also, I was wondering if you could add a little bit of commentary around your outpatient medical portfolios, how the guidance ticked up? And it seems like in the past few quarters, there's been a little bit more negativity around that portfolio and maybe if there have been some shifts in there.

Speaker 5

Yes. I would say that our asset managers that oversee the outpatient medical have been doing a really good job. They've been able to retain some tenants that we had expected were going to move out. They've been able to do some renewals well in advance of expiration. I think we're probably getting fairly close to the bottom for that portfolio for our same store portfolio.

Speaker 5

I think you might see occupancy drop slightly in the third quarter, but fully anticipate that numbers are going to get better starting in the fourth quarter, both from an occupancy and an earnings standpoint. I think the biggest driver of that business is the hospital systems. And unless and until the hospital systems decide that they want to take more space, you're going to see this sort of a very low growth, maybe depending on your expirations, some negative growth, which is an oxymoron. But I think that's generally the business. We're feeling good about where we're headed.

Speaker 5

I think we've got maybe 10 assets ten, eleven assets at the end of the quarter that were not in same store. Of those, I think one of them is already sold, five of them are under contract or letter of intent, and the other five are in various stages of being exposed to the market. So I think we are at a nadir, if you will, for that portfolio.

Speaker 2

Daryl, this is Danny. I'd just add, I certainly feel better about that space today than I did a year ago. There's always been good activity from a leasing perspective, lots of interest. The biggest issue, I think, in the last year or two has been the health systems themselves, downsizing upon renewal, looking to cut costs. I mean they've had a tough few years.

Speaker 2

And it feels like most of that is behind us. At least that's how it feels to me. So I am certainly more optimistic about the next twelve months than I was about the last twelve months.

Speaker 8

Thank you.

Operator

Your next question comes from the line of Wes Golladay from Baird. Your line is open.

Speaker 2

Hi, Wes. Hey, everyone. Hey, guys. Just want to go back to that Medicare Advantage, potential for higher rates and getting more contracts. Is there any seasonality to the renewals?

Speaker 3

No. Not really. The contracts are too fragmented to see that really come through. I think, the the one caveat to that, Wes, is that maybe three quarters of those contracts have a fixed increase, annual increase that's based off of PDPM, off the CMS increase. That happens October 1 every year.

Speaker 3

So you'll see a proportionate increase in the Medicare Advantage rate based on the increase in the Medicare rate come October 1. Okay.

Speaker 2

And then just one more for you. When you look at the acquisition of the unstabilized assets, would that be the last of the nonconsolidated assets?

Speaker 3

At Trilogy? Yes. Yeah.

Speaker 2

Yeah. Although there still are a few select assets that Trilogy either manages or leases that we do not yet own that we expect over time that we will own. So there's there's there's, you know, another, call it, four assets off the top of my head that I can think of that, I would expect us to to to acquire in, you know, potentially one this year, maybe the rest next year or the year after. So there's a few more, but most of what Trilogy operates now, we already own.

Operator

Your next question comes from the line of Nick Yulico from Scotiabank. Your line is open. Hi, Nick.

Speaker 9

Thanks. Hi, everyone. So first question is just on Trilogy and the same store NOI growth guidance, which you raised. Can you just talk about the back half of the year? It seems like there is a little bit of a slowing expected in the back half of the year, and I'm not sure if that's just due to tougher occupancy comp or if there's any other issues.

Speaker 9

Thanks.

Speaker 5

No. You're on track there. The reality is that at the midpoint of that Trilogy same store guidance, it denotes fairly flat for the rest of the year. I will say that there is certainly seasonality that Trilogy has experienced over time in the second and third quarters. Now second quarter didn't really come to fruition.

Speaker 5

Their post acute occupancy was quite strong. But there's something referred to as the dog days of summer, which basically means that there's not a lot of people that are doing elective surgeries during the summer months. And certainly, there's a lot less of the flu that's hitting people because you're much more outdoors. So there is a little bit of headwind, I would say, to the third quarter. There's a little bit of headwind on Medicaid rates, especially in Ohio in the fourth quarter.

Speaker 5

But ultimately, that's flat. If we hit the midpoint, even a little bit of growth might get us to the higher end of that range. But I think the

Speaker 2

biggest issue is that we saw market increase last year, so we're comparing ourselves to

Speaker 5

a higher base. And certainly much more difficult comps in Q3 and 2024.

Speaker 2

Yes. Because we do have some I mean, a lot we have several Medicaid increases that kicked in July 1, and then we have a Medicare increase that kicks in October 1, but the same thing happened last year.

Speaker 9

Alright. Thanks. That's that's helpful. Second question is just in terms of the, the interest expense guidance, going down. Was that just a function of raising more equity in the plan?

Speaker 9

And how do you how should we think about sort of the funding mix, versus debt on incremental investments? Thanks.

Speaker 5

Yes. Short answer is, you're right. We have been successful in paying off debt. And that's in part the biggest reason why the debt to EBITDA calculation has improved. But beyond that, the cheapest source of equity that we can source is obviously retained earnings.

Speaker 5

And with our dividend payout where it is, we are retaining some earnings, and we can utilize those dollars to pay for some of our external growth. Beyond that, we have been a user of the ATM in the past. It's an extremely efficient product with a very low cost. I would anticipate that we would like to be able to do that in the future. And then finally, we have enough capacity on our revolving line of credit to be able to take down all of the pipeline that we described today.

Speaker 5

So we have the ability to buy the assets, and I think we have good sources of capital to do that.

Speaker 10

Okay. Thanks, Brent.

Speaker 5

Thanks, Nick.

Operator

Your next question comes from the line of Seth Berge from Citi. Your line is open.

Speaker 9

Hi, Seth. Okay.

Speaker 10

Thanks for taking my question. I just wanted to kind of ask about the new operator and kind of how much of the pipeline is with existing operators? How much of the pipeline is with new operators? And then how do you think about of operator selection? Like, what's the criteria you look for when partnering with new operators?

Speaker 4

Yes. Hey. This is Stefan. So, first of all, I'd say we're very excited about Great Lakes joining us and and having that relationship. It's already paid dividends in in a number of ways.

Speaker 4

You know, they we in terms of how we go about selecting new operators, it's something that we do in a very measured way. We wanna make sure that they check the boxes for us. And, you know, we're very lucky that we've been in this space for a long time. We're very familiar with a lot of the operators out there. We have a lot of folks on our team that have either worked with or worked part or aware of a number of these operators on different levels.

Speaker 4

That was certainly the case with Great Lakes. We had previous relationship with them through someone on our team, and and, we had identified them as someone that, we had an interest in in potentially doing something with in the future. It's the same situation with, any other operator. We're we're gonna be looking at what is you know, what kind of culture do they have both from a care perspective, an employee engagement perspective. We wanna make sure that, there are groups that look are looking to grow, have an interest in growing in the future.

Speaker 4

We're not necessarily interested in in adding operators where it's one and done. We wanna make sure that these are groups that have aligned interest with us in terms of where to grow, how to grow, how quickly to grow. And, know, obviously, we're looking at operators that fit within the markets that we have an interest in. So, you know, it's a it's a very thoughtful process. We're collaborating between us here through all levels of the company to to determine who we wanna move forward with.

Speaker 2

But but just to clarify, this isn't a situation where we were awarded a building, and then we said, Now who do we wanna use to operate it? Actually, the operator came first. So both of these operators are groups that I've been hearing about from the investments team and the asset management team for a long time, groups that we wanted to do deals with. And in at least a couple of instances that I'm aware of, they actually brought us the transaction on an off market basis. So this is this is you know, our head of asset management had a prior experience with one of the senior folks at at Great Lakes and, said, hey.

Speaker 2

Let's see if we can, you know, find some buildings to do together. And, clearly, they would like to work with us. I think we have a pretty good reputation as an owner. You know, we have a pretty good you know, pretty good at in incentivizing our operators. You know, if they if if the building does well, they do well.

Speaker 2

And we're long term holders, which is kind of what they're looking for as opposed to someone who just wants to come in and flip a building. So we are incentivized to find good operators, and they're incentivized to bring us good buildings. So the operator came before the building in both of these situations.

Speaker 4

Yeah. And also just to go back to your original question about, the allocation. If you look at what we've closed on and what's in our pipeline, I would say that we're probably somewhere in the 65%, 70% that are still with, our existing or our current operators. But there are definitely, this has definitely proved out to be a positive thing and that we are seeing opportunities, to grow with with the new operators.

Speaker 10

Great. That's helpful. And then you talked a bit about kind of the Medicaid Advantage and kind of the optimal mix of customers. Can you remind us kind of what the margin flow through is on incremental occupancy? And then anything else on the revenue management side or cost structure that you're kind of looking at to grow to continue to grow margin expansion?

Speaker 2

I think you said Medicaid Advantage, you meant Medicare Advantage. So I mean, our overall op margin at Trilogy is is now, you know, back up to where it was pre COVID in the in almost twenty percent. We expect it to continue to increase. Now the incremental margin, it's

Speaker 5

it's really tough to say.

Speaker 2

Right? And it depends on so many different things. It depends on the acuity level of who you're bringing in. It depends on how well occupied the building is. You know, I could throw out a number as to what I believe the incremental margin is, but it would be kind of just my gut feeling.

Speaker 2

And clearly, an IL, it's higher, on AL, it's lower, and on skilled nursing, it's even lower. But Medicare Advantage, which would clearly be skilled nursing and it would probably be a higher acuity level because it's someone coming in usually post hospitalization, You know, I would say that's probably an incremental, I don't know, forty percent is my guess. But that's just a guess.

Speaker 3

Yep. That that feels right to me too, Danny. And I think keep in mind, Seth, that at Trilogy, we're adding beds constantly. We're developing new products, and we're adding new campuses. And as we continue to do that over the years, the mix within the buildings is shifting even more to senior housing than skilled nursing.

Speaker 3

So I think by nature of the bed mix shifting in the future, when we're talking about this second quarter in 2026, we'll see higher margins that are just coming through high margin IL product that's being added to the total, me, total Trilogy portfolio. That's a

Speaker 2

great point, Gabe. Because, you know, looking at Trilogy's margins today versus whatever they were seven years ago, it's not really apples to apples. Right? Because there's so much more AL and IL today than they were seven years ago. Because, we've added villas.

Speaker 2

The new campuses tend to have a much higher percentage of AL and IL versus campuses that were developed ten years ago. So I would expect to see Trilogy's margin continue to go up as their mix relies more on private pay AL and IL.

Speaker 3

And I think the second part of your question on revenue mix or revenue management, how that's working. I think Trilogy is the best example we have in our portfolio right now on what they're doing, mainly maybe because they got to higher occupancies faster than everybody else in the in the industry and had to really rely on revenue growth to drive NOI growth. So Trilogy has centralized the revenue management function for all of their a 130 campuses at the headquarters. And that rev they brought in a consultant that had a aviation hospitality background to help them optimize their revenue management program and put it in place. That program delivers to a dashboard in each building a toolkit that provides the ED with the the tools that they need to make decisions about what's the right rate for unit specific decisions that take into account the view, the location in the building, things that are far more sophisticated than what you've seen in the past in senior housing.

Speaker 3

It takes into account what the market rate is in those markets. It takes into account what the occupancy is, what the tours, have been, what the leads are, and gives you a real time view of what you should be pricing your units at so that you can make sure that your street rate and when you bring in a new resident, you're getting the optimal rate. That program, I think, works incredibly well and is why they've been very successful in managing revenue. That program is also something that we've started test piloting to see if we can replicate it with our other operators and create platform value by having not only good information for other operators, but good resources to help them execute on the strategies that are being that are coming out of that good information. So it's bridging two things, the information gap for operators across the country in our portfolio, but also the execution gap to make sure all of the operators have the resources they need to to execute on revenue management.

Speaker 3

And not just revenue management, there's, you know, maybe half a dozen other key initiatives where we can kinda leverage the Trilogy platform to do similar things.

Speaker 10

Great. Thanks.

Speaker 2

Operator? Operator, are there?

Speaker 5

This is awkward.

Operator

Yeah.

Speaker 3

I think we can wrap it up, Danny.

Speaker 1

Yeah. Alright.

Speaker 2

Well, I I I apologize if anybody had any more questions. It looks like we may have lost our operator. Feel free to reach out to Brian, myself, Gabe, Stephane. Happy to answer any further questions. And we want to wish everyone a great weekend.

Speaker 5

Thank you.

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