Invesque Inc. (IVQ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Invesque's Second Quarter 2020 Earnings Conference Call. I will now turn the call over to Scott Higgs, Chief Financial Officer. Please go ahead, Mr. Higgs.

Thank you, Amy. Good morning, everyone, and thanks for joining the call. With me today are Scott White, our Chairman and Chief Executive Officer, and Adlai Chester, our Chief Investment Officer. Scott will start things off discussing some color around the industry and the ongoing COVID-19 impact to our portfolio. I will then cover our financial results, and Adlai will review our portfolio performance and some strategic portfolio management efforts before opening the call up for Q&A. The second quarter 2020 earnings release, financial statements and MD&A are available on our website, and a replay of this call will be available from 12:45 p.m. Eastern Time today until 11:59 p.m. Eastern Time on August 20. Before we get started, please be reminded that today's call may include forward-looking statements regarding our future operations. Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today. We have identified such factors in our news release and other public filings. As we discuss our performance, please bear in mind that all amounts are in U.S. dollars. With that, I'll hand it over to Scott.

Good morning, all. Thank you for joining our second quarter 2020 earnings call, and I hope everyone joining the call is safe and healthy. When we last spoke in mid-May, we were 2 months into the COVID-19 pandemic and that continues to impact all of us, both personally and professionally. Before diving in to discuss the quarter and our recent activities, I want to say thank you once again to our operating partners and frontline caregivers for their hard work and tireless commitment to keeping patients and residents safe over the last 5 months. All the positive videos and stories we have seen from our communities during these trying times have been truly inspiring, and we're grateful to be partnered with such dedicated operators. We continue to focus on our 2020 asset management initiative to ensure we are maximizing profitability and enhancing the value of our assets. Our portfolio management plans are a continuation of our strategy of building a world-class portfolio with the right partner in each of our communities across our various business lines. As you have seen in the last few quarters, we are proactively and thoughtfully replacing operators when we think there's a chance to enhance value. With that said, I am pleased to announce that we will be transitioning the property management and leasing services for our MOB portfolio to JLL. When we entered the MOB business with the acquisition of Mohawk 2 years ago, we always had a vision of scaling and institutionalizing this platform. JLL is a world-renowned leader in property management services and will significantly expand our capabilities. Adlai will touch on more specifics around the transition to JLL later in the call. Given the rapid changes in the market environment and elevated uncertainty around COVID-19, I'll focus my comments on what we're observing at the ground level within our portfolio and across the industry. The COVID-19 pandemic continues to create a challenging operating environment for many of our partners. Like our publicly traded peers, we are not immune to the impacts of the virus on operations and financial performance. We remain in constant contact with our operators and are pleased to report that we have seen significant decline in COVID positive cases within our portfolio over the last 30 days. This trend has occurred despite many states beginning to reopen and continued increase of COVID positive cases across the United States. Many of our operators that were impacted in April and May have now implemented phased reopening plans where they're able to conduct small group activities, dining and family visitations, all under strict protocols, to continue protecting residents and staff. As of August 7th, 70 of our 106 seniors housing and skilled nursing assets have been impacted with positive COVID-19 cases in residents and/or staff. More importantly, as of August 7th, there are only 29 total patients or residents with COVID-19 being treated and quarantined in Invesque communities today. Considering the size of our portfolio of almost 11,000 beds, we are pleased to have so few active cases at the moment. The community level impact varies across our portfolio with very few positive cases today, which is a great improvement from where we were 90 days ago. The current rate of incidents in our portfolio is significantly below peak activity observed across the portfolio in mid-May. This trend of moderation in active cases began in the first week of July and has remained steady since that time. One important thing to note is that the cases that are currently being observed in our skilled nursing facilities are generally direct admissions of COVID-19 patients from hospitals to improve capacity in local health systems and are being cared for in dedicated COVID-19 units. We continue to be extremely proud of our operators' effort navigating through this challenging time. We acknowledge we are not on the other side of this pandemic quite yet, but we are confident that our operators have implemented the necessary policies and procedures to continue taking the best possible care of their residents and staff during this time. Our skilled nursing operators have received government funding relief under the CARES Act, and we are happy to see that an additional $5 billion was committed to this relief effort in late July. In addition, we were pleased to see that CMS has finalized the previously proposed rule to increase Medicare funding to nursing homes by $750 million or 2.2% for the 2021 fiscal year, which begins on October 1 this year. Although our senior housing operating partners have not received similar relief under the CARES Act to date, we are hopeful that industry trade associations and lobbying efforts will result in some federal relief in the coming months. We are encouraged that HHS has begun collecting data from seniors housing operators to evaluate the possibility of providing financial aid, and we have confirmed that our operators have participated in this data collection effort. At the state level, we're encouraged by recent announcements of relief efforts where we have significant senior housing exposure. Virginia and Pennsylvania, 2 of our largest markets as a percentage of our NOI, both recently announced state funding relief for assisted living providers. While we do not have specific numbers yet from our operators in these states, we expect the relief payments will offset a substantial amount of the short-term COVID-related expenses they have incurred. Moving onto the Commonwealth vertical of our business, we are thrilled to see the Commonwealth acquisition and portfolio management efforts over the last year continue to strengthen our results. As a reminder, Commonwealth is our subsidiary seniors housing management operating company and represents almost 25% of our forward-looking NOI. Our ownership of Commonwealth provides us unique insight into day-to-day financial and operating performance of one of the most sophisticated operators in the industry. The 20 asset Commonwealth portfolio we acquired last year saw a 660-basis points improvement in NOI on a quarter-over-quarter basis, despite a 220-basis point dip in occupancy in the portfolio during that quarter. This is a function of pricing power and rate growth with average daily rates increasing almost 200 basis points quarter-over-quarter and over 500 basis points on a year-over-year basis. The results are particularly impressive considering the ongoing pandemic. In terms of census trends within the Commonwealth portfolio, we're very encouraged by the positive sales trends over the last 6 weeks, with occupancy up by roughly 100 basis points since the end of the second quarter. In summary, we're encouraged by the results of our portfolio. Rent collections continue to be strong. Our team continues to work productively from home, and our liquidity is in good shape as we look at our short-term obligations. While sentiment toward seniors housing and skilled nursing will remain challenged in the short-term, our regional secondary market focus with local sharpshooters has proven to be a sound strategy over the last few months. We will continue to focus on maximizing profitability and asset value within our portfolio for the balance of the year to strengthen our high-quality portfolio of real estate with our preferred partners. Before turning the call back to Scott Higgs to discuss our financial performance for the quarter, I do want to highlight a couple of awards Commonwealth has received over the last couple of months. Commonwealth was certified as a great place to work by the Great Place to Work Institute for the second year in a row and was also recently recognized as one of Argentum's Best of the Best for one of its innovative programs. We continue to be very excited about our relationship with the Commonwealth team and look forward to continued success. With that, I'll pass it to Scott.

Thank you, Scott. For the quarter ending June 30, FFO was $0.19 per share, and AFFO was $0.17 per share. Excluding the impact of COVID-19 and severance costs for the 3-month period, FFO was $0.21, and AFFO was $0.19 per common share. As we discussed in May, in the second quarter we announced a series of initiatives to strengthen our liquidity position and preserve cash. To stay ahead of the curve and maintain flexibility, we announced the suspension of the dividend to common shareholders as of April 1, 2020. The dividend suspension will result in approximately $41 million of gross cash preserved on an annual basis. To further enhance our liquidity position, we took immediate cost reduction measures, including the suspension of executive team cash bonuses, personnel cutbacks and other G&A reductions. All these cost-cutting measures are anticipated to result in approximately $2.5 million to $3 million of cost savings in 2020, and we have started to see the impact in the second quarter results. We have also curtailed and deferred nonessential capital expenditures, which will result in an additional $2.5 million to $3 million in cash savings. We continue to analyze additional liquidity measures, including the possible sale of assets. With the refinancings completed in the first half of the year, we have dealt with the majority of our near-term current obligations. The remaining current obligations contain company-controlled extension options at no cost. Assuming we exercise our extension options, we have only 3% of our total debt maturing over the next 12 months. In addition to laddering our maturities, we have been very active throughout the first half of the year in the refinancing market. Our refinancing activity year-to-date has allowed us to create almost $1 million in year one cash savings through lower rates and interest-only periods. We continue to work closely on other refinancing options throughout our debt stack that are projected to yield at least another $1 million in cash savings. We have, on a consolidated basis, reduced our average cost of borrowing by approximately 35 basis points since the end of 2019. Given the uncertainty in the marketplace, I want to spend a few moments on rental revenue collections. As a percentage of gross rents due, our collections remain consistent at approximately 94% for the months of May, June and July, up from our trough month in the second quarter of April at 88%. Breaking this down a bit further, collections in our consolidated SHOP portfolio were approximately 99%. Collections in our MOB portfolio were approximately 93%, and collections in our triple-net portfolio were approximately 85%. As of today, our August rental revenue collections remain in line with July. Further, in the second quarter, given the pandemic and the impact in our business lines, we have increased the risk factors in our valuation models, which in turn caused a lowering in value of our investment properties and increased reserves on loans receivable. With that, I'll pass it over to Adlai to discuss our portfolio performance for the quarter and additional details on the upcoming MOB portfolio transition to JLL.

Thanks, Scott. As of March 31, our stabilized triple net portfolio remained consistent in terms of coverage and occupancy with previous quarters. On a trailing 12-month basis, our EBITDAR and EBITDAR coverage ratios were 1.2 and 1.5x, respectively. Our trailing 12-month occupancy as of March 31 stood at 85% for our triple-net assets and 87% for our stabilized SHOP assets. For the medical office portfolio, stabilized occupancy stood at 87%. As of June 30, our trailing 12 months and trailing 3-month occupancy for our stabilized SHOP assets stood at 86% and 83%, respectively, while our medical office portfolio stabilized occupancy stood at 86%. While we do not have complete Q2 coverage and occupancy numbers to report for our triple-net portfolio, it is our expectation that these numbers will trend down in light of the effects of COVID on the industry and our portfolio. As we noted last quarter, portfolio management is and continues to be a key focus for Invesque. We are excited to announce that we are in the final stages of transitioning the management of our MOB portfolio in the United States and Canada to JLL. Mohawk, JLL and Invesque have all been working together over the last few months to ensure a smooth transition in the third quarter. As a reminder, we entered the MOB space with the Mohawk acquisition over 2 years ago. We have continued to grow the portfolio since the Mohawk acquisition by expanding further into the U.S. Today, our MOB portfolio is comprised of 15 assets, representing approximately 578,000 square feet of space across Canada and the U.S. As we execute on our portfolio management initiative for 2020, our main goal is to ensure that we have the right partner in place for every single property in our portfolio. As we look at the MOB portfolio, we concluded that now is the right time to bring in a larger, more institutional property manager with global reach and scale. JLL is one of the leading property management companies in the world with over 4.6 billion square feet under management. We believe that their robust platform, global reach and top-notch leasing services will allow us to maximize profitability going forward. The breadth of their relationships and capital markets capabilities will also provide us proprietary market color around the transaction and financing markets in North America. We have announced several partner transitions over the last few quarters and continue to prioritize our asset management initiative. This initiative could lead to additional partner transitions during the remainder of 2020. Two areas of focus in active discussions are with Symphony and Bridgemoor. In both cases, we are working through interim COVID-19 relief as well as possible long-term restructurings of their current leases. These 2 portfolios have been hit hard by the pandemic, which has resulted in significant decreases in occupancy and increases in operating expenses. It is still too early to tell exactly how these restructures will play out. We continue to explore all options, including a potential rent reduction, a re-tenanting of the portfolios, a sale of certain properties, or a combination of the 3 options. We will report back to you once we have more to share on these topics in the coming quarters. Year-to-date, we have 2 operators with written deferrals in place for our entire triple net portfolio. In the case of Symphony, we granted a rent deferral of 50% for the month of April and 25% for the months of May, June, July and August. In addition, we granted one other operator in our portfolio a rent deferral of 25% for the month of May. This deferral is currently being paid to us in equal monthly installments from June 2020 through May 2021. Our pipeline on the acquisition and development front remains light as the COVID-19 pandemic continues to significantly impact the United States and our industry specifically. As mentioned last quarter, transactions that we are likely to pursue over the next few months will be limited to those that we are already under contract with, or with existing relationships and with other preferred partners. With that, we will now open the line for questions.

[Operator Instructions] Your first question today comes from the line of [ Shuran Surat ] of BMO.

My question is primarily around the G&A expense related to the pandemic. So I know you incurred about $930,000 in Q2. What's the broad guidance going forward? What do you expect to incur?

Thanks for that. Yes. So I think in terms of a run rate in terms of quarterly savings, I think it's a pretty fair run rate, what you saw in Q2. In terms of cash G&A, yes.

Perfect. Thinking about the bad debt expense that came out this quarter in terms of $1.4 million, do you expect that to kind of go up in the future? And how do you think about that?

So yes, this is Scott Higgs. Look, I think it's going to depend on what happens in the marketplace. And every quarter, we evaluate our risk evaluation models and our collectability model. And it is facts and circumstances based on those specific situations in those points in time. So it is hard to predict exactly what is going to happen with that over the course of time, but certainly something we're very focused on.

Your next question today comes from the line of Chris Couprie of CIBC.