This report was generated using published research from our REITs team led by Sector Head Rob Simone. If you want to access more REITs research, CLICK HERE.
American Healthcare REIT, Inc. (AHR) represents a compelling, attractively-priced option to participate in the upside embedded in the Seniors Housing/Healthcare subsectors of REITs.
AHR is a diversified healthcare real estate investment trust with consolidated gross investment of approximately ~$5 billion across around 300 properties. This portfolio spans various segments, including:
- Integrated Senior Housing Campuses (ISHCs): 41% of annual base rent (ABR)/net operating income (NOI), focused in the Midwest across four states with a mix of senior housing and skilled nursing units.
- Medical Office Buildings (MOBs): 36% of ABR/NOI, 90 buildings leased to hospitals and physician practices, providing cash flow stability through triple-net or absolute net leases.
- Seniors Housing Operating (SHOP): 8% of ABR/NOI, operates 46 facilities under RIDEA structures for independent living, assisted living, and memory care services.
- Senior Housing Triple-Net Leases (SH NNN): 4% of ABR/NOI, 20 facilities leased under long-term, triple-net leases.
- Skilled Nursing Facilities (SNFs): 8% of ABR/NOI, 15 facilities leased to third parties, focusing on high-acuity care under long-term, triple-net leases.
- Hospitals: 3% of ABR/NOI, minimal exposure with leases under triple-net agreements.
In other words, ISHCs + SHOP already represent a ~50% and growing share of AHR’s economics. These are the assets where AHR participates in the EBITDA of the properties, as opposed to rent. We see the most upside in these segments.
FINANCIAL PERFORMANCE AND OUTLOOK
Emerging from its recent initial public offering (IPO), AHR’s first quarter as a publicly-traded REIT outperformed consensus estimates, delivering Core FFO of $0.38/share which was 23% above expectations. This performance underscores the company's capability to manage and exceed market expectations out of the gate.
The company's guidance for FY24 anticipates a same-store net operating income (SSNOI) increase of 5% to 7%, indicating a modest deceleration from the previous year's growth rate. However, this projection could be seen as conservative, particularly considering the robust performance of AHR’s integrated senior housing campuses (ISHCs) and senior housing operating properties (SHOP), which are showing accelerating growth metrics and remain well-below prior pre-COVID peak levels. These segments, critical to AHR's portfolio, have demonstrated a potential for higher growth than initially forecasted for the first half of FY24.
POST IPO: MARKET POSITION AND COMPETITIVE EDGE
AHR’s deleveraging through its IPO, raising approximately $717.6 million and significantly reducing net leverage, has positioned the company on firmer financial ground. The reduction in leverage is a vital step towards achieving a more attractive cost of capital, as public markets typically do not tolerate higher leverage levels for REITs.
UPSIDE POTENTIAL
The company's net asset value (NAV) estimation suggests an appealing upside from the current market valuation. With a going concern NAV in the range of approximately $18-19/share, AHR presents a potential for approximately 30% upside before dividends. This valuation is supported by the company’s ownership of newer-vintage assets and its relationship with Trilogy, a key operator in its portfolio, providing a unique competitive advantage.
However, investors should also consider the risks associated with AHR’s relatively high leverage compared to peers and its need for additional equity capital to fuel external growth. The company's success in realizing the upside potential of its ISHC/SHOP segments will be crucial in overcoming these challenges.
CONCLUSION
In conclusion, American Healthcare REIT stands out as a distinctive player in the healthcare real estate investment trust sector. With its promising first-quarter performance, conservative yet potential-filled SSNOI growth projections, strategic deleveraging post-IPO, and significant NAV upside, AHR presents a compelling case for long-term investment.
APPENDIX
- RIDEA: REIT Investment Diversification and Empowerment Act (RIDEA) is a legislative framework in the context of Real Estate Investment Trusts (REITs) in the United States. Passed in 2008 as part of the Economic Stabilization Act, RIDEA allows REITs to invest in and manage operating assets through taxable REIT subsidiaries (TRSs). This was an important change from previous regulations, which generally restricted REITs to owning properties that generate passive rental income, thereby limiting their ability to directly operate properties or engage in businesses related to their properties. Under RIDEA, REITs can participate more actively in the operational income and gains from their investments, particularly in the healthcare and hospitality sectors, where operational income can be a significant component of the property's overall value. By setting up a TRS to operate these assets, a REIT can benefit from both the property's income and its appreciation, while still complying with the requirement that the majority of its income comes from real estate-related sources.
- Integrated Senior Housing Campuses (ISHCs): These are comprehensive care facilities that offer a range of senior living options and services, including independent living, assisted living, and skilled nursing care, all within one campus.
- Medical Office Buildings (MOBs): These are buildings leased to healthcare providers, such as hospitals and physicians, often featuring specialized medical facilities for outpatient services.
- Seniors Housing Operating (SHOP): A segment within REITs that operates senior housing facilities directly or through managed partnerships, allowing for participation in operational income and profits.
- Senior Housing Triple-Net Leases (SH NNN): Lease agreements for senior housing facilities where the tenant is responsible for all expenses of the property, including maintenance, taxes, and insurance, in addition to rent payments.
- Skilled Nursing Facilities (SNFs): Healthcare facilities providing high-level medical care and daily living assistance to individuals requiring significant medical attention, often on a long-term basis.
- Core FFO (Funds from Operations): A measure of a REIT's operating performance that adjusts FFO for certain items considered not indicative of the core operating results, such as acquisition expenses.
- Same-store net operating income (SSNOI): A financial metric used to evaluate the income performance of properties owned by a REIT for the same duration across different periods, excluding the impact of acquisitions and disposals.
- Net asset value (NAV): The total value of a REIT's assets minus the total value of its liabilities, often used to assess the company's underlying value on a per-share basis.
