Invesque Inc. (IVQ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Invesque's Third Quarter 2021 Earnings Conference Call. I will now turn the call over to Scott Higgs, Chief Financial Officer. Please go ahead, Mr. Higgs.

Thank you, and good morning, everyone. Thanks for joining the call. With me here today are Scott White, our Chairman and Chief Executive Officer; and Adlai Chester, our Chief Investment Officer. I will first hand things over to Scott to provide a brief industry update and walk through some of our highlights from the quarter. I will then discuss our third quarter financial results, and Adlai will close things out with some additional details on disposition activity and other portfolio management efforts to date in 2021 before opening the line for questions. The third quarter 2021 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 November 18. As always, 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 will pass it over to Scott.

Good morning. Thank you all for joining our third quarter 2021 earnings call. I'm happy to report that we hosted our Board of Directors yesterday in Indiana, and we're doing an in-person earnings call for the first time in 18 months. I spent a few days in Houston last week with a couple of members of our team at our key industry conference, the NIC conference, and I can honestly say, it was great to be back with many of our industry peers and operating partners for a couple of days. There's great energy, collaboration and excitement regarding the future of our industry, and I know our team is feeling reenergized as we head into the final months of 2021 and look out to 2022. Our team has been very busy over the last 90 days with our active portfolio management initiatives. We kicked off the quarter by completing the previously announced sale of 4 seniors housing assets back to our former tenant Inspirit Senior Living on July 1. As a reminder, this sale resulted in approximately $15 million of net cash proceeds, which were used to continue delevering our balance sheet. As I will touch on the specifics of the transaction a bit later in the call. In early October, we sold 5 small noncore assisted living communities in Pennsylvania that were previously managed by Saber Healthcare subject to a long-term triple-net master lease. The assets struggled historically from a financial perspective and were a drag on the portfolio lease coverage ratios that also include 2 skilled nursing facilities. The sale of these 5 properties netted approximately $2.7 million in proceeds that were used to delever. As part of the sale, Invesque reduced the rent by approximately $215,000 annually to account for the 5 sold assets. Saber continues to operate the 2 skilled nursing facilities, which are subject to a triple-net master lease with enhanced coverage, thus strengthening our portfolio and the relationship with Saber for the long term. We look forward to continuing to partner with them on this portfolio. In late October, we sold a property in Richmond, Virginia, netting Invesque $3.4 million in cash proceeds. Upon careful assessment, we decided in tandem with Commonwealth to strategically close the property at the end of 2020 and move the property to our held-for-sale bucket earlier this year. While the property is in an excellent location in Downtown Richmond, our market assessment of Commonwealth assistance led us to conclude the property as best positioned for an alternative use. Proceeds from this sale were also used to further delever our balance sheet. Before I turn the call over to Scott to discuss our financials, I'll provide a quick update on COVID-19 and its continued impact on our industry. We continue to see minimal COVID-19 positive cases within our portfolio as most residents and a good majority of associates have received the COVID-19 vaccine. We still see an occasional outbreak at communities within the portfolio, but the number of deaths and serious illnesses have been minimal. I'm extremely proud of our operating partners and their commitment to the care and safety of residents and staff. It has truly been a heroic effort over the last 18 months. I'm extremely grateful for everything they continue to do. I mentioned that I spent last week at the NIC conference. Let me spend a few minutes sharing with you some of the industry themes prevalent there as well as the recent trends we're seeing in our Commonwealth Senior Living portfolio. As a reminder, Commonwealth is our captive senior housing operating and management company subsidiary. Commonwealth currently operates and manages 34 communities in the Mid-Atlantic region of the United States led by CEO, Earl Parker. Commonwealth continues to see strong long-term move-in numbers following trough census in the first quarter of this year. Occupancy at Commonwealth continued to trend positively throughout the second and third quarters and this momentum continued through October. Spot occupancy in the 20 community Commonwealth portfolio that we acquired in August of 2019 was 170 basis points higher on September 30 versus June 30, and 250 basis points higher versus March 31. This favorable trend continued in October with the 20 community portfolio adding an additional 35 basis points of occupancy over that month. Looking beyond just the Commonwealth community portfolio, our overall stabilized SHOP portfolio saw an approximately 140 basis point jump in occupancy quarter-over-quarter. Despite the occupancy gains we have seen in our Commonwealth portfolio and other SHOP assets over the last 6 months, the operating environment continues to be challenging with the labor and staffing headwinds coming to the forefront. The staffing crisis you hear about daily in the news and likely see your grocery stores and restaurants has had a significant impact on the seniors housing and care industry as well. Operators are struggling to find and retain staff, and we are all, as an industry, laser-focused on finding creative ways to attract new talent to the industry. We're confident that the demand for our product type over the next few years is coming full steam ahead as the 80-plus demographic continues to move in our favor, but solving the staffing challenge for now and in the years to come is a critical piece of the industry puzzle. On the other side of the coin, social security benefits are expected to grow for seniors by almost 6% in 2022, which is the largest increase in these benefits in nearly 40 years. When coupling these increases in social security benefits with inflation and acceleration in street rates that our public peers have indicated over the last few weeks, we believe our operators have the proverbial wind at their backs to start pushing rate over the coming quarters. We will continue to collaborate with our operating partners and industry peers to tackle these challenges and capitalize on the opportunity to capture top line growth to offset labor challenges and wage pressure. I remain optimistic about our team, our stable tight net operators and our exceptionally young portfolio as we navigate the environment over the coming years. With that, I'll hand it over to Scott to touch on some key financial metrics for the quarter.

Thank you, Scott. For the quarter ending September 30, FFO was $0.10 per share and AFFO was $0.08 per share. Compared to the second quarter, we saw a reduction in AFFO of approximately [ $0.06 ] per share of the Commonwealth portfolio, of which $0.04 was associated with stimulus funds received in Q2 that was not received in Q3 as well as increased COVID-related costs incurred in Q3, which accumulated to approximately $0.02 per share. We do expect that our operators will receive additional funding from HHS through the recently announced Phase 4 funding. In September, the government announced a $25.5 billion in additional funding available for health care providers affected by COVID-19. Of this amount, $17 billion has been allocated to providers who lost revenue and incurred additional expenses because of the pandemic. Many of our operating partners have submitted the required documentation to HHS, and we expect funding under Phase 4 will be received prior to year-end or shortly thereafter. We will provide an update on the results of this potential funding as it becomes available to us. During the third quarter, we continued to shore up our balance sheet and use excess cash to delever. We utilize proceeds from the asset sales, Scott mentioned earlier, to pay off property level mortgages and pay down our corporate credit facility. Compared to last quarter, we were able to reduce overall company leverage by approximately 100 basis points, which also represents a reduction in leverage of nearly 300 basis points in Q3 of '21. These strategic dispositions allowed us not only to delever, but also to enhance our flexibility through additional availability under the credit facility. As we move forward with our delevering strategy, we will look to utilize proceeds in the most accretive manner from a capital structure perspective with a particular focus to pay down our higher-priced debt given the favorable interest rate environment. Consistent with this approach, we are constantly evaluating strategies to solidify our financial position and provide the company with financial flexibility. At the end of the quarter, we announced proposed enhancements to the terms of our 2016 convertible debentures that are due at January 31, 2022. After dialogue with a number of debenture holders, we have further revised the enhancements that were originally offered at the end of September. These further revisions have been unanimously approved by the Board that have been positively received by debenture board. The enhanced terms featured a $20 million pay down on January 31, 2022, an increase to the interest rate from 5% to 7% and a decrease in conversion price from $11 to $5 and a 3-year extension of the maturity date to January 31, 2025. Our goal with this extension is to provide enhanced terms to existing debenture holders while providing the company and all of its stakeholders with additional financial flexibility for other strategic initiatives. As of September 30, we have less than 7% of our debt maturing over the next 12 months. Our financing team seems to be busy exploring opportunities to take advantage of the current capital markets with a renewed focus on consolidating debt at very attractive rates to further ladder our maturities. The debt markets continue to remain attractive, and we're actively looking up and down our capital structure to maximize cash flow and value for our stakeholders. With that, I will turn the call over to Adlai.

Thanks, Scott. Before I kick off, it is important to remind you all that we report the operating metrics of our triple-net lease portfolio a quarter in arrears due to the timing of receipt of operator financial statements. We continue to see some challenges in our triple-net portfolio as operators continue to deal with lingering effects of COVID and work to solve the staffing challenges that Scott touched on earlier in the call. On a trailing 12-month basis for the period ended June 30, our stabilized portfolio EBITDAR and EBITDARM coverage ratios were 1.0x and 1.3x, respectively. As of June 30, our trailing 12-month occupancy for the stabilized triple-net assets and stabilized SHOP portfolio was 74% and 78%, respectively, while our medical office portfolio stabilized occupancy declined slightly to 82%. As Scott noted at the top of the call, we closed on several dispositions during the third quarter. This activity is in line with our continued efforts to streamline the portfolio and focus on the assets and operators that are long-term strategic holds for Invesque. We are focused on continuing to work with a group of operators and partners that we believe are some of the best in the business, and we'll look to grow with them in 2022 and beyond. We closed on the sale of 4 senior housing communities to our former tenant Inspirit Senior Living on July 1. The transaction was a win-win for all sides as we achieved strong pricing for the properties and Inspirit was able to accelerate their go-forward strategy to own more of their own real estate. The transaction resulted in over $15 million of net cash proceeds to Invesque. We used the net proceeds to delever our balance sheet. And with the closing of the sale, we closed out our relationship with Inspirit. We hold Inspirit in high regard, and we wish them all the best in the future. In addition to the sale of the communities to Inspirit and the other noncore dispositions over the last few months in October, we transitioned operations of 2 senior housing communities in New York to an affiliate of Hearth management. Hearth has been and continues to be one of our preferred operators in New York, and the transition is in line with our portfolio management initiative to ensure we have the right partner in each of our assets. We are excited to expand our relationship with Hearth and grow their strategic footprint in the region. These 2 properties were previously operated by Premier Senior Living and were subject to a long-term triple-net lease. With the transition, the 2 properties were moved to Invesque's SHOP portfolio and Hearth entered into an interim consulting agreement that will convert to a management agreement once regulatory approvals are received. Once regulatory approvals are received, Invesque will no longer have any partnership with Premier. We appreciate Premier's cooperation throughout the process to minimize any disruptions to the residents and wish them continued success with their go-forward operations in the senior housing space. We continue to focus on portfolio management and streamlining our partnerships to ensure we have the right operator in place for each of our owned assets. Through our active portfolio management initiatives over the last 2 years, we have assembled one of the youngest portfolios in the public health care real estate space today with an average age of slightly over 10 years. This is an important achievement to highlight given the older age of the assets of some of our peers. As Scott noted earlier, the industry and the economy as a whole are struggling with labor inflation. Having older assets that require maintenance will cause a larger cost burden to these older assets, fresh and competitive ones will provide a much better solution. With new construction at a 5-year low pressure on labor and supply chain issues driving costs is much harder for new projects to get off the ground and hit budgets. Having a young portfolio with occupancy upside provides a unique competitive advantage over some of our public peers and should position our operators to see outsized NOI growth over the coming years. Our strategic repositioning has also shifted the balance of our portfolio to be predominantly private pay with nearly 60% of our pro forma NOI coming from senior housing versus over 75% of our NOI coming from skilled nursing at the time of our IPO 5 years ago. Shifting to a majority private pay portfolio has been a long-term goal for our team, and I'm proud of where we stand today with skilled nursing today representing slightly over 35% of our pro forma NOI. In addition, we have strengthened our credit profile and stability of our cash flows with 12 years of average lease duration in the triple-net lease portfolio today. I'll now comment briefly on transaction activity in the senior housing and skilled nursing space. In spite of the challenges, the COVID-19 pandemic has presented to both asset classes. Transaction activity continues to heat up in the health care real estate space. Several companies have announced intentions to or have deployed in excess of $5 billion in investment capital with a particular focus on the senior housing sector. The transactions have closed at featured cap rates that are well below historic norms of the industry and many of us have featured attractive per unit prices, which we estimate to average around $200,000 per unit. These valuations compel us to continue to diligently manage our portfolio and capitalize on strategic dispositions at very favorable pricing for assets we view as noncore. In the coming months, you can expect to see additional transactions to further push us towards senior housing. We will continue to transition properties to strengthen alignment and grow with our preferred partners while continuing to dispose of our noncore assets. As we have always done, we remain laser-focused on maximizing value for all of our stakeholders, whether through transitions, dispositions or acquisitions with an eye on growing our private pay exposure with our preferred operating partners. With that, I would like to thank everyone for joining the call. And operator, please open the line for questions.

[Operator Instructions] First question comes from Joanne Chen from BMO Capital Markets.

I guess just maybe sticking on the disposition front, how should we think about, I guess, kind of the magnitude over the near term? And your thinking around the redeployment of the proceeds, whether they kind of still focus on the debt reduction? Or are you seeing attractive opportunities on the acquisition front right now?

Joanne, so in terms of dispositions, I think you've seen over the course of the last year and quarter, we have selectively disposed of small noncore assets. I don't think you should expect to see a massive portfolio disposition. You'll continue to see a number of the facilities that either aren't corridor operations or operators that we don't see an opportunity to grow with as the types of assets we'll dispose. In terms of redeployment of capital, we've generally been focused on delevering and providing incremental liquidity. There are opportunities in the market. We're being very disciplined and selective in terms of redeployment of that capital for the right opportunities, we will deploy that capital. But right now, it's really focusing on delevering, as we mentioned a few times, and on preserving liquidity.

Got it. Okay. That's good to hear. And I guess just with current things environment recovering with COVID, have you noticed a continuous improvement subsequent to quarter end with respect to overall...

Yes, we absolutely have. We've noticed substantial improvement in a couple of respects. First, for the most part, the industry has been able to handle and contain the COVID virus. We're seeing fewer outbreaks across the industry. We're certainly seeing fewer deaths and fewer severely negative outcomes. So I'd say that's a positive. We're seeing enhancements in occupancy across the industry. I'd say that's a positive outcome. The issue and a concern that I highlighted in my comments and I think it's worth reemphasizing is the industry is really struggling with labor, and that has an impact on the bottom line. So while we are getting more people in the door, we're also requiring more caregivers and the industry is struggling as our many industries, and we are not immune.