Invesque Inc. (IVQ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Invesque's Fourth Quarter and Year-end 2020 Earnings Conference Call. I will now turn the call over to Scott Higgs, Chief Financial Officer of the company. Please go ahead, Mr. Higgs.

Thank you, Cindy. Good morning, all, and thank you for joining us. I'm joined today by Scott White, our Chairman and Chief Executive Officer; and Adlai Chester, our Chief Investment Officer. Scott will get us started with a couple of industry highlights and an update on COVID-19 and vaccination within our portfolio. I will then cover our fourth quarter and year-end financial results, and Adlai will review the status of some previously announced strategic efforts before opening the line for Q&A. Please note that the fourth 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 March 18. Before I turn the call over to Scott, 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, and thank you for joining us this morning to discuss the company's fourth quarter results. 2020 was a unique year in so many ways. Our industry was challenged, our portfolio was challenged, our company was challenged. We worked through the challenges we never could have anticipated. However, with 2020 in the rearview mirror, I'm cautiously optimistic about where we're headed in 2021 and beyond. I'd like to start once again with a very sincere thank you to our operating partners and their teams for their ongoing efforts and dedication over the last 12 months as the COVID-19 pandemic drastically impacted the day-to-day operations of our industry. I continue to be in awe of health care workers' response to this pandemic, and I'm hopeful and excited that the vaccine rollout will allow our partners to begin returning to some sense of normalcy in the coming months. Our operating partners are critical to our company's success, and I'm prouder than ever of the partners Invesque has. We're very appreciative of you all. Since Invesque was formed 5 years ago, we have acquired numerous assets. We have sold noncore assets, and we have strategically transitioned to assets to different operating partners. At the beginning of the last year, we set out with a very clear strategic plan for 2020 to focus on portfolio management to assure we're maximizing value within each asset of our portfolio. We made significant headway on this portfolio management initiative last year. We transitioned to operations of the majority of our former greenfield portfolio to our proprietary management company, Commonwealth Senior Living. We maximized value in our Royal Senior Living portfolio through a combination of asset sales and a transition of the remaining portfolio in South Carolina to expand our relationship with Phoenix, one of our strategic operating partners. And we transitioned the management of our medical office building portfolio to JLL, a world-class leader in property management across the globe to further institutionalize that platform. But we're not done yet. We continue to look across our portfolio at each asset to make sure we have the right operating partner on an asset-by-asset basis. Further, we constantly review each asset and make sure we believe the asset remains core to our strategy. In cases where the assets are not going to help us grow shareholder value we have sold the assets and we'll continue to look for opportunities to sell other assets if we can lock in favorable pricing. We closed out the year and expanded our relationship with Constant Care by acquiring a Memory Care Community in Rogers, Arkansas. Constant Care is an important relationship for Invesque, and we're excited about the opportunity to expand our relationship with them. Adlai will touch on this acquisition a little later in the call. As announced on our last call, we signed a nonbinding memorandum of understanding with Symphony, our largest skilled nursing operator in the fourth quarter that includes a combination of asset sales to Symphony, a transfer of operations of a handful of facilities to a strong regional operator and an amendment to our existing master lease for the remaining assets in the portfolio. This is a complicated transaction that is progressing as we work through the details. While there's still wood to chop between now and closing, we're optimistic that our team and Symphony will continue to work towards a mutually beneficial solution that sets all parties up for success over the long term. As currently contemplated, we expect this transaction to have a negative impact on overall AFFO, but a positive impact on our concentration risk to Invesque. It is my expectation will be in a position to share more details soon. As has been the case over the last 12 months, the COVID-19 virus continues to create a challenging operating environment for our portfolio in the entire industry. Our portfolio saw an increase in COVID-19 cases in December and throughout the first 45 days of 2021. With that said, we're pleased to see a significant decline in positive resident cases in our buildings through the back half of the first quarter of 2021. As of March 5, our portfolio currently has only 38 total patients or residents with COVID-19 being treated and quarantined in Invesque communities, which is down significantly from the high point we saw in May and June of 2020 when there were over 700 positive cases. This is quite the feat when looked at in the context of our approximately 11,000 beds across the entire portfolio. Despite the increase in COVID cases that our operators saw late last year and into the beginning of 2021, we're optimistic that the vaccine rollout is helping to create an environment where our operators can begin returning to some prepandemic visitation activity norms. Many of our operators have seen a very high resident participation in the vaccine clinics that have been held at the properties and continue to urge their staff to receive the vaccine. As of March 5, 95% of our U.S. seniors housing and skilled nursing properties have cycled through the first phase of vaccination, and almost 90% of the properties have also cycled through the second phase of vaccination. Our operators are working closely with local and state health agencies to determine what COVID protocols will remain in place in the coming months to ensure the health and safety of our residents and staff, while beginning to reestablish dining, activities and visitations that were in place prepandemic. At this time, reopenings remain driven by state and local mandates, but most of our communities have reopened for in-person tours, small group activities, communal dining, and are allowing some form of family visitation. We expect that the limitations currently in place will continue to be reduced as the vaccine is rolled out more broadly. Just yesterday, the CDC announced relax visitation activity restrictions within seniors housing and skilled nursing facilities. As we have discussed on prior earnings calls, federal and state government support to date has been helpful in offsetting some of the financial burden experienced by our operating partners because of the pandemic. To date, our operating partners have received approximately $71 million in government funding. We believe that additional funding will be critical for the industry, and we are hopeful that the government continue to target operators that have been disproportionately impacted by COVID-19. Despite the challenges that 2020 brought, I do feel a sense of rejuvenation and excitement from our operating partners and our team. The rollout of the vaccine seems to be providing a small light at the end of the tunnel. To be clear, it will take time to remount senses, and there will be elements of COVID-19 safeties and precautionary measures that remain for the future. However, we remain very optimistic about the industry and the investment portfolio. As I said many times in the past, real estate is a long-term asset class. Our investment thesis is predicated in part on a massive wave of aging baby boomers. The pandemic did not change the demographic fundamentals. As one of the youngest portfolios in the industry, we're well positioned for long-term success and shareholder value creation. Our Invesque team also weathered the storm of 2020 extremely well. The team has been remote for 12 months and did not miss a beat. I am very pleased to report that we were recently named one of the best places to work in Indiana for the second consecutive year. This award is a true testament to the team and the culture we have built, and I could not be more excited to lead this team for many years to come. We continue to be driven by our core values of excellence, positive energy, family, teamwork and fun and look forward to getting together in person in the coming months to celebrate our successes. With that, I'll hand it back to Scott Higgs to touch on the company's financial results.

Thank you, Scott. For the quarter ending December 31, FFO was $0.19 per share and AFFO was $0.17 per share. For the year ending December 31, FFO was $0.87 per share, and AFFO was $0.77 per share. It was a busy year for our finance team, as we were able to successfully refinance multiple loans, taking advantage of the lower rate environment. These refinancings allowed us to extract some excess proceeds while allowing us to further ladder our maturities. During 2020, we executed on multiple financing transactions that will reduce debt service by approximately $1 million on an annual basis. We continue to actively evaluate opportunities within our portfolio to take advantage of the favorable credit market. I'm pleased that there are no meaningful debt maturities in the near term. As of today, we have approximately 3% of our consolidated debt rolling over the next 12 months. As a reminder, we modified our senior credit facility led by KeyBank in the fourth quarter of 2020. The modification provides us an incremental surge period through June 30, 2021, which will allow us to maintain our current leverage on a consolidated basis with the existing unencumbered asset pool. During the incremental surge period, the corporate leverage covenants increased to 65%, which allows us for incremental liquidity of approximately $9.5 million. Upon completion of a series of transactions underlying the new framework with Symphony, the credit facility will be reset back to the original covenant level, except for the fixed charge coverage ratio, which is permanently reduced from 1.7x to 1.6x. Our leverage for purposes of the bank covenant was approximately 60.3% at 12/31, and we have sufficient cash or other alternatives to ensure we're below the 60% threshold by June 30. The modification will allow us to continue executing on our portfolio management strategy through the remainder of 2021 and beyond. As we discussed throughout 2020, portfolio management continues to be our key area of focus. We're excited about the new -- the potential framework with Symphony, and we look forward to continuing our long-standing relationship with their team. Although we expect short-term reduction of rental income received under the new structure in 2021, we anticipate that rental revenue will stabilize in 2022. With that, I will pass it over to Adlai.

Thank you, Scott. As of September 30, on a trailing 12-month basis, our portfolio-wide EBITDAR and EBITDARM coverage ratios were 1.2x and 1.6x, respectively. After removing the impact of government stimulus dollars and extraordinary expenses related to COVID-19 our portfolio-wide EBITDAR and EBITDARM coverage ratios would otherwise be 1x and 1.3x, respectively. As of September 30, our trailing 12-month occupancy for the stabilized triple net assets and stabilized SHOP was 79% and 84%, respectively. While our medical office portfolio stabilized occupancy increased slightly to 87%. As expected and as noted by many of our peers in their earnings releases over the last couple of weeks, our operating partners saw a decline in occupancy in the fourth quarter and early part of 2021, as many states were seeing significant increases in COVID-19 positivity rates. We were not immune to this, but are pleased with our operator's ability to maintain NOI in a very challenging environment. We expect to see this trend reverse and to see occupancy start to trend positively again in the back half of 2021 as the majority of our communities will have a significant portion of the residents vaccinated and be less restrictive on move-ins and visitations. As noted in our press release this morning, in the fourth quarter, we acquired a 32 unit Class A memory care community in Rogers, Arkansas. Upon closing of the acquisition, we entered into a 15-year absolute triple net lease with Constant Care, one of our preferred operating partners that specializes in memory care communities. The lease includes 2, 5-year extension options and allows us the ability to consolidate this asset into our existing master lease with Constant Care in the future. This expands our existing relationship with Constant Care to 8 communities and Constant Care will represent approximately 4% of our pro forma NOI. We have worked closely with Constant Care over the last few years, and we'll look to continue to grow with them as we believe they are one of the best operators in the space for this product type. As an example, we have a small mezzanine investment in a new development with Constant Care in Grand Rapids, Michigan. This investment gives us the right to acquire the 42 bed memory care building in the future. The building was open towards the end of 2020 in the middle of COVID, even with the headwinds, the Constant Care team has ramped occupancy in this building to almost 50% in just a handful of months. We are also excited to announce the completion of significant expansion projects at 3 Commonwealth Senior living communities in Virginia. These projects progressed according to schedule despite the COVID pandemic and as of the middle of February 2021, have all received final licensure approvals and are moving in new residents. These expansions will allow us to cater to the pent-up demand in these markets while increasing Invesque's overall private pay exposure. The Commonwealth platform continues to be a bright spot in Invesque' portfolio, and we look forward to working with Earl Parker, the recently promoted CEO of Commonwealth and the rest of the Commonwealth team on additional expansion projects across the portfolio in the coming years. As we touched on last quarter, we continue to work closely with Bridgemoor given the impact that pandemic has had on their operations. The Bridgemoor properties are transitional care assets that mostly serve patients immediately after a hospital stay. The pandemic and national weather disasters have significantly disrupted hospital operations in Texas. As a result, Bridgemoor's operations have suffered far more than others in our portfolio as they are sitting in the proverbial eye of the storm in many respects. During the fourth quarter, we did not recognize revenue from Bridgemoor, and we previously reserved against the full amount of our working capital loan to Bridgemoor. We continue to explore all options as we strive to maximize the value of our assets within this portfolio. Our acquisition and development pipeline has picked up slightly in 2021, and we continue to be excited about future growth opportunities in our seniors housing and skilled nursing portfolio. With that said, we continue to focus on managing both sides of our balance sheet and will only invest with new partners or portfolios if we have access to appropriately priced capital. We will continue to look for strategic opportunities within our existing portfolio to grow with our preferred operating partners via expansion projects, while opportunistically divesting of noncore assets if we can achieve attractive pricing. With that, I would like to thank everyone for joining the call. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Tal Woolley with National Bank Financial.

I just maybe wanted to start a bit on the political front. Obviously, there's been this massive stimulus package passed in the U.S. by the new President. I'm just curious with respect to the stimulus, are -- do you see money in there going to the right places to help your operators? And then the other thing I was sort of wondering about longer-term with the Biden administration is just, what do you get a sense of the outlook for Medicare and Medicaid reimbursement spending?

So Tal, yes, there's no doubt that the government stimulus has been vitally important to our industry, like a number of the hard hit industries in the U.S. There's no 2 ways about it. We were really impacted in meaningful way as a result of the pandemic and the dollars through various forms of various iterations, as we mentioned before. Approximately $71 million has ended up so far with our operators, and it is our hope and expectation there will be more. It really -- I'm not sure I could put a magnitude on it in terms of it not being in us. There's no doubt in my mind that as you look at the impact on occupancy, you look at the impact on expenses. If you look at the impact on the overall holistic pandemic it was very much needed, and I am hopeful and optimistic that we will see more. In terms of the Biden administration, I'm often careful when I -- and I've been asked this question over the years, not only as it relates to change in presidents, but even as it changes as a result of midterm elections, Republican versus Democrats and so forth. I often remind people that our investment thesis really is predicated on long-term ownership of real estate assets. And while the current administration might impact some segment of that, i.e., a 4-year period or maybe 8-year period. Everything that comes goes and comes back again, it feels like, has been my experience over the course of watching different administrations go. I'd say net-net, it is likely a positive as it relates to increased Medicare, but it's very hard to predict. And I am cautious about going out there and saying, yes, this type of administration is potentially better or worse. I think in general, the political landscape understands and appreciates the necessity for taking care of our older population. And I think one of the things the pandemic did was put a spotlight, maybe I should say, a magnifying glass on the industry and remind people what an important part of the health care sector it is.

Okay. I just want to say thanks to you all for providing a lot more disclosure just around the individual operating segments. It's very helpful to us on the outside. And to that end, I just -- I wanted to talk a little bit about the medical office building. You've got a fairly significant leasing hill to climb over the next 3 years. I think over half the portfolio is up for renewal and occupancy has been soft. So can you just talk about how you're thinking about that slice of the business over the next few years? And what are the prospects for reclaiming back all that or being able to solve that space?

Yes. So as you know, Tal, last year, we made a transition from our predecessor operating partners who are our current operating partner. Our predecessor operating partner did a very nice job of those assets. They knew those assets well. They knew the market well. They had very local relationships, which is very important. We made a strategic decision to bring in a national -- actually, I should say, international, quite frankly. But an institutional type asset manager or a portfolio manager to -- in part because of exactly what you identified. We knew that. Obviously, we looked out a couple of years, we project and instead of react, we're proactive. And part of the decision to bring in JLL was really focused in part on looking at this lease roll off over the coming years and having access to a sophisticated global organization in JLL. And we've seen some early signs. And anything is pretty early. Remember, JLL, just took over, I guess, 5 months -- 4, 5 months ago. But we're certainly seeing early signs of lease-up in the portfolio and some other tweaks to the portfolio outside of lease-up to enhance NOI.

Okay. And you mentioned you've got sort of very little debt to roll over the course of this year. Just 2 specific pieces. The Magnetar facility, has that been refinanced yet?

With -- you're talking about the -- the $10 million loan?

The $10 million. Yes.

It has not. It has not. We know that's coming due in the next few months and have the expectation that cash flow from operations will likely pay off that debt.

Okay. And any thoughts to just planning for the 2015 debentures?

Yes. So we had since the beginning of taking on those debentures, both sets of debentures. We have 2 sets of debentures, one coming due next year and one coming through the following year. We've always had a cash management land to make sure we're in a position to pay that -- those debentures off when they come due. And right now, based on our projections and based on, hopefully, everything lined up the way we expect it to, we do have sufficient cash flow in our projections to pay off those debentures that come due next year and then the debentures that come due in 2023.

Okay. But no intention -- like I was just wondering if maybe the debenture market had moved in a way, it might make sense to call them or anything like that, but nothing like that planned yet?

Not at the moment, I mean, we're always monitoring, and it is possible that we might start buying them in or calling them, but right now, that is not our plan.

Okay. And then just lastly, from a tax perspective, I'm just wondering, like, is there -- when do you think you might have to reconsider the distribution again because you sort of have to because of like your taxable income growing? Or do you think you're -- you still have -- you can still hold it suspended for this period of time because it's great that keeping it suspended certainly helps on the balance sheet side. I'm just curious sort of how your tax positioning is with respect to the distribution?

So there are no tax requirements for us to distribute as you may know Tal, we are not a REIT.

Right, right, Pardon me, sorry. Some question.

Yes. Not a problem. Other people have asked similar questions. You're not the first one, and probably not the last one. But there are no tax implications to us making a distribution. We do assess that distribution on a monthly basis and would very much like to return it to our shareholders when we feel comfortable that we've gotten to the other side of this pandemic, and we have sufficient financial flexibility to be able to do so.

Our next question comes from the line of Mark Rothschild with Canaccord.

Maybe starting with the property that you bought in Rogers, if you give some information on the cap rate you bought it. And what was interesting about it? Obviously, with having this going on, you're probably not running to do many acquisitions. So I assume there's probably more to it?

Yes. No, this is Adlai. Thanks for that question. We were just north of a 7% cap on it. The thing that we liked about the Rogers is we already have 7 buildings with Constant Care. This building was 100% occupied and stayed that way pretty much through COVID and is at that level again. So it enhanced the overall portfolio with Constant Care. And we continue to really like Constant Care. So you're exactly right. We're not looking with our current position to acquire a bunch of assets right now, but when we see an opportunity to strengthen the portfolio through an acquisition, we're going to try and act on it if we can.

Okay. Great. And maybe just within the overall numbers and if it's in the disclosure, I haven't seen it yet. But how does the NOI or the FFO that is reported differ from maybe actual cash received? Like were there any tenants that -- specifically, any tenants i.e. Symphony that did not pay a portion of the rent in the quarter? And if so, how would that impact the numbers?

Higgs, you want to take that one?

Yes, sure. So look, I think we do disclose in there, Mark, in terms of while we don't disclose specifically about individual situations or tenants, there is disclosure in there around loan balances that go to that point. So to the extent, I guess, what I would say is to the extent that we've provided some working capital loans or what have you, that would be captured within that disclosure there. So other than that, like I said, we don't disclose specific information about individual tenants and so forth.

Can you give the overall broad numbers? And if not on individual tenant basis, what would NOI or FFO have been adjusted to on a cash basis if we back out money that wasn't paid as per leases?

Higgs, you got that?

Yes. So again, it's a number I can help you off-line perhaps, Mark. But it's looking at the loan -- the change in the loan balance is year-over-year and factoring that in really is how you -- how to contemplate that.