American Healthcare REIT, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

American Healthcare REIT, Inc. is a real estate investment trust (REIT) that acquires, owns, and operates a diversified portfolio of healthcare-related real estate properties, primarily senior housing facilities, medical office buildings, and other healthcare-related assets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

American Healthcare REIT, Inc. (AHR) operates primarily in senior housing (which accounts for a large chunk of the assets) facilities, medical office buildings, and a few other types of healthcare related real estate. They are not a pure play on any one of those segments, giving diversification. They mostly operate in the US but have a presence in the UK as well. The company’s performance is therefore impacted by macro economic indicators, government regulation, interest rates, capital markets, etc.

Business Overview:

Senior Housing: AHR’s portfolio primarily consists of senior housing facilities, which include independent living, assisted living, and memory care residences. The success of these properties depends on demographic trends, health outcomes, government regulations, and local markets. The senior housing sector is currently experiencing a growing supply of units which is creating pressure on occupancy, but the management sees this as a temporary issue.
Medical Office Buildings (MOBs): These properties cater to healthcare providers, such as physicians, clinics, and outpatient centers. The performance of MOBs depends on occupancy rates, location, and tenant quality and is usually more stable than senior housing facilities.
Other Healthcare-Related Assets: The company also invests in a limited number of other healthcare-related properties, such as hospitals and skilled nursing facilities, which offer a diverse range of revenue streams but come with their own specific risks. They are usually riskier than other types of healthcare assets due to their specialization and regulation.

Industry Trends and Competitive Landscape:

Demographic Shifts: The aging population in developed nations will likely drive the demand for senior housing and healthcare services, which are the core assets of AHR. However, at the same time, an increasing supply of senior housing facilities as well as increasing supply from new technologies (AI in healthcare, remote healthcare) has also been a recent trend in the market. AHR is facing the consequences of a combination of these factors.
Economic Factors AHR is negatively impacted by high inflation and high interest rates, which is a general trend in the market and not specific to the company. This means that the company’s expenses increase, while they are not able to increase pricing enough to cover the increasing expenses, which leads to squeezed margins.
Increased Competition: The healthcare real estate market is becoming increasingly competitive, with multiple players offering similar kinds of services. For example, high competition has resulted in large rent increases at facilities, which are sometimes passed onto tenants. Higher rates are bad because it makes the company’s properties less desirable than the competitors’ and tenants are very sensitive to pricing and are willing to move to a new property to pay less. The high supply also means lower occupancy for some periods.
Technological Advancements: Technology is rapidly changing how healthcare is being delivered, potentially leading to more cost-efficient operations in facilities. For instance, remote monitoring devices, can reduce staffing needs. Further, the adoption of telemedicine can potentially reduce the need to visit offices. The management mentioned that they see it as a good sign that the number of visits has been decreasing, and they expect technological change to help them in growing efficiently, without directly being influenced by higher input costs such as labor, and it will help lower costs even while the demand for the properties increases.
Regulatory changes: The healthcare industry is heavily regulated in the US, UK and various parts of the world. Any regulatory changes can affect the way healthcare properties operate and affect AHR’s investments. The management says it has been closely following the regulatory landscape, so they can mitigate or take advantage of those changes.

Competitive Advantages (Moat) :

AHR’s moat is mostly based on specialized operations and geographical diversification.

Geographic Diversification: AHR has investments in a wide variety of locations in the U.S and a few in the U.K. This somewhat minimizes risk.
Specialized Operations: AHR operates in the healthcare sector which requires specialized knowledge and is generally more difficult to operate than many other industries.

Moat Rating: 2/5

AHR has a weak moat as there are multiple competitors, both large and small, with properties in similar sectors. AHR is somewhat protected with economies of scale, and with specialized knowledge, but there are very few entry barriers for a company to enter this sector.

Moat Risks and Business Resilience:

Interest Rate Risk: Higher interest rates can hurt AHR’s ability to borrow cheaply, decrease the value of existing assets, and decrease occupancy as potential tenants or patients become more cost conscious.
Operational Risk: AHR is exposed to risks of poor execution by management, or bad strategic decisions which can permanently lower value. Also, if any part of AHR is not up to safety and healthcare standards, there will be reputation damage, lawsuits and large expenses associated with that.
Economic Uncertainty: Recessions, inflation, or changes in the economy affect consumer income, which has a direct influence on the ability of individuals to utilize their services. It also affects the costs of services, which they have to pay.
Tenant defaults: The company faces the risk that its tenants have the risk of default. Some of the facilities, such as for senior housing, could be exposed to losses due to poor management, or competition from other similar properties.
Government Regulations: Any change in healthcare regulations, reimbursement policies or other government actions can have a significant impact on AHR’s operations and financial health.
Technology Disruption: The company must adapt with changes in technology as new devices and strategies can lower the demand for traditional brick and mortar healthcare facilities.

Business Resilience: AHR’s business operations, especially senior living, are relatively recession-resistant since older people need healthcare and living facilities regardless of the economy. The company also operates in a defensive sector with some barriers to entry, which means the company is likely to survive over time. So, AHR is reasonably resilient to a wide variety of bad economic circumstances.

Financials:

Overall, the company’s financials have been quite complex and are somewhat difficult to understand because of the complicated nature of the business and the numerous acquisitions and divestitures they have made.

Revenues: AHR’s revenues primarily come from rental income and the sales of properties. Given that the company primarily owns real estate, rental income is very significant for the overall revenue number. A major part of the revenue is generated by multi-year contractual commitments (leases). Any changes to market rate, or lower occupancy, greatly affects the revenues of the company. Due to the nature of their business, most of the revenue is long-term and they have consistent revenue numbers. They have struggled with occupancy recently, but that trend will reverse over time due to growing demand for their services.
Expenses: They have significant operating expenses related to the property, labor, maintenance costs, administrative expenses and interest expenses.
Margins: AHR’s operating margins have been relatively stable and they usually make an EBITDA margin of around 20-25 percent, which is normal for most REITs. They have been consistently expanding and have had issues maintaining profitability. High interest rates, high inflation and increased competition are also affecting their margins.
Earnings: Their net earnings have been fluctuating as the company has done a lot of expansions through acquisitions. Any acquisition will be expensed out, which will affect their profitability. They need to carefully balance acquisitions with profitability, especially in a high interest rate environment.
Debt: AHR has a heavy debt load. For 2023, the company has total assets around $4.739 billion, total liabilities around $3.002 billion and total equity around $1.737 billion. Although they have a lot of assets, a substantial part of that is financed with debt. They have a history of buying new businesses and real estate, and have accumulated large debts. Any changes to the borrowing rate will immediately affect the earnings of the company. They claim that they have a plan to pay off debts, though it will require them to sell some assets and focus more on profitability than growth, which the company is currently focused on.

Understandability Rating: 3 / 5 AHR’s business model, while clear in its goal of owning and operating healthcare properties, is complex in its financials and operations. It requires a good grasp of real estate, macroeconomics, interest rates, healthcare, and the impact of government regulations, making it somewhat difficult for a retail investor to understand and analyze the company.

Balance Sheet Health Rating: 3 / 5 AHR’s balance sheet is borderline. It has a lot of debt, and it will be a challenge for them to reduce it. If they are successful in their strategic turnaround and can focus on profitability, the debt should become more manageable and the company’s financial health will improve. Any future rate hikes or any unforeseen event might cause more pressure.

Recent Concerns, Controversies, and Management Response:

High Debt Load: AHR’s significant debt is a major concern. The management has stated their intentions of deleveraging and a focus on profitability.
Occupancy: They are seeing lower occupancy in some properties due to intense competition. This is expected to improve with improving economy and more demand, but it is something to keep an eye out for.
Dilution: The company is likely to have to issue more shares for expansion. They also stated the possibility of using shares to pay off some of the debt. This will lower earnings per share for existing investors.
- Management Response: Management acknowledges these concerns and stated during the last earnings call that they will try to prioritize profitability instead of expansion and reduce their debt. They are also focused on operating improvements.
Their goal is also to keep a proper balance in debt and equity which will create maximum value for investors. They also believe that they have a quality portfolio that will appreciate over time, and that is not a source of concern.

However, they have also expressed their need for capital, and that is only possible if they dilute shares. They are balancing long-term stability with the need to obtain capital for further growth.