Invesque Inc. (IVQ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Invesque's Fourth Quarter 2021 and Year End 2021 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 on the call today are Scott White, our Chairman and Chief Executive Officer; and Adlai Chester, our Chief Investment Officer. Scott will kick things off with a summary of Invesque's disposition activity in 2021 as well as a brief COVID and operations update. I will then dig into our financial results for the fourth quarter and full year, and Adlai will wrap things up with some color on portfolio trends and acquisition and disposition activity. We will then open the line for questions. The fourth 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 March 17. 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 turn the call over to Scott.

Good morning, and thank you all for joining our fourth quarter 2021 earnings call. It's hard to believe that it's already March and over 4 months since our last call. Our team had a very busy end to 2021 and has been working tirelessly over the last couple of months, have positioned our portfolio for future success. I plan to briefly remind you all of our 2021 disposition activity as well as highlight an add-on acquisition that we completed with one of our preferred operating partners earlier this year. And then we'll provide a real-time update on COVID-19 within the portfolio and highlight some recent operating trends from our SHOP portfolio. 2021 was a record disposition year for Invesque. We sold more than $210 million worth of assets over the course of the year with almost half of that occurring in the fourth quarter. As previously announced, in October, we sold 5 small noncore assisted living communities in Pennsylvania previously managed by Saber Healthcare, netting approximately $2.7 million in proceeds. Additionally, in late October, we sold a vacant property in Richmond, Virginia, netting Invesque $3.4 million in cash proceeds. Subsequent to our earnings release in November, we sold a 5-property portfolio to The Ensign Group for $93 million. The sale included a 4-property skilled nursing portfolio with 436 beds that was previously operated under triple-net leases by Ensign and a 144-bed assisted living community previously operated under a triple-net lease by The Pennant Group. The assets were located in California, Kansas and Arizona and were owned in a joint venture. The sale provided the joint venture with approximately $22 million of net proceeds following the repayment of outstanding debt and transaction costs. Although we were sad to lose Ensign and Pennant as operating partners, given their strong track records, we're pleased that we were able to quickly execute the sale in very attractive pricing. Earlier this month, we sold an assisted living and memory care community in Harrisburg, Pennsylvania to a regional operator in the Northeast that is looking to grow their assisted living platform. This community was previously managed by our wholly-owned operator, Commonwealth Senior Living. And after much consideration, it was determined that the asset could be better suited for a group that is more local to the Harrisburg market. Although the majority of the sale proceeds were used to pay down debt, this sale represents another example of our team's ability to dispose of assets that do not fit our operating partners long-term strategies. I'm pleased by the level of disposition activity in 2021, and I expect us to continue to dispose of noncore assets. As I have mentioned in the past, our strategic focus right now is to simplify our portfolio and their capital structure. We continue to identify noncore assets and look to sell at appropriate pricing. To be clear, we're not looking to exit assets at pricing we don't believe properly reflects the value of those assets. Turning from dispositions to acquisitions. On February 1, we closed on the purchase of a standalone memory care community in Wyoming, Michigan that was added to our existing master lease with Constant Care. Adlai will provide further details on this transaction later in the call. But it's important for me to highlight that we'll continue to grow our portfolio with our core operating partners in markets that have viable long-term potential. While I highlighted a strategic focus on dispositions, it's important to note that we will continue to grow as well. Our overall strategic direction is to continue to simplify our portfolio and our capital structure. I'll now turn to COVID-19, which has been a topic on our earnings call for over 2 years, following an increase in positive COVID-19 cases in December and January, as the Omicron variant spread rapidly through the U.S., we are currently seeing very low levels of positive cases within the portfolio. For the most part, associates and residents that are vaccinated but tested positive see minimal or no symptoms. The largest impact we continue to see from the virus in the fourth quarter relates to staffing and the requirements from positive members to the -- staff members to be out of work for a handful of days, further impacting staffing challenges that are more prevalent than ever. We've begun to see this trend slow in the early part of 2022, and we're cautiously optimistic that it will continue throughout the remainder of the year. I'm proud of and grateful for our operating partners' dedication to keeping residents and staff safe and healthy, and I'm hopeful we continue to see the impact of the virus minimize as we move forward through 2022. The team at Commonwealth continues to rebuilt census following 2020 and 2021, where occupancy and overall financial profitability were significantly impacted by Following trough census in the first quarter of 2021, Commonwealth saw strong move-in numbers during the second half of the year. The core '20 asset portfolio that Invesque owns, operated by Commonwealth, saw a 110 basis point increase in occupancy in Q4 as compared to Q3, and current occupancy as of March 4 is an additional 50 basis points higher than Q4 2021. We're proud of the Commonwealth team's resilience and look forward to further positive momentum in the coming months. As I touched on briefly last quarter, and you have likely heard from our peers over the last few weeks, staffing continues to be the #1 challenge our industry is facing. Despite the continued occupancy gains in most of our SHOP portfolio assets, agency staffing costs in the fourth quarter of 2021 were higher than we have ever seen. Our operating partners are getting creative and trying many initiatives to come at the staffing crisis. We know this issue is likely a challenge that will be in place for the foreseeable future. I think it's important to note that most of our senior housing operators did increase residential rental rates in 2022 at a higher percentage than what has been done historically in order to offset some or all of the increases in staffing costs that are being seen. And we continue to evaluate whether or not those increases were sufficient or additional increases will be needed later this year. Overall, I'm extremely proud of our team and what we accomplished last year. It wasn't an easy year for the industry or our company. We're a relatively small team, and it was a true team effort to accomplish what we did in 2021. I also have to highlight that we were recently named as one of the best places to work in Indiana for the third year in a row. I look forward to celebrating the success with the team soon. With that, I'll hand it over to Scott to touch on some of our financial metrics.

For the quarter ending December 31, FFO was $0.11 per share and AFFO was $0.09 per share. And for 2021, FFO was $0.47 per share and AFFO was $0.44 per share. On November 15, 2021, the company announced an amendment and partial redemption of $20 million of the 2022 convertible debentures. In January of 2022, we completed the redemption by repaying $20 million of the outstanding principal plus all accrued and unpaid interest. The remaining outstanding 2022 debentures were amended to change the interest rate to 7%, effective January 31, 2022, and extend the maturity date of the remaining outstanding 2022 convertible debentures to January 31, 2025. This amendment and extension provides the company more financial flexibility as we work with our operating partners to come out of the pandemic stronger than ever. It also provides our debenture holders with what we feel is an attractive investment opportunity. On December 20, 2021, the company announced that the Toronto Stock Exchange approved its notice of intention to make a normal course issuer bid for a portion of its common shares and a portion of its 6% convertible unsecured subordinated debentures due September 30, 2023, as appropriate opportunities arise from time to time. Any normal course issuer bid will be made in accordance with the rules of the Toronto Stock Exchange. Purchases under both programs began in January 2022, and we continue to believe that this nominal use of capital is of great inherent value to the company and its stakeholders. At the end of the year, the finance team successfully extended the maturity of the company's $200 million revolving credit facility led by KeyBank by 1 year. The credit facility is now due in December 2023, which is coterminous with the corresponding KeyBank term loan. Additionally, this amendment also permanently reduce the company's fixed charge coverage ratio covenant from 1.6x to 1.5x. This change provides additional cushion and resizes the covenant to more appropriately correlates to the composition of our portfolio. Our team was intensely focused on delevering throughout 2021, and I'm happy to report that we reduced overall company leverage by more than 300 basis points, ending the year at approximately 57%. We were able to accomplish this goal by strategically disposing of noncore assets as well as utilizing organic cash flow generated by the portfolio. And this is consistent with our strategy, as Scott just highlighted. This initiative has further solidified our balance sheet puts us more in line with targeted leverage levels and lowers our monthly carrying costs. As of December 31, we had approximately 6% of our total debt maturing over the next 12 months. However, as we sit today, that number is 1.5% because of the work we've done earlier this year to refinance and extend pending maturities. Our finance team will continue to look for opportunities to maximize value and streamline our capital stack. In fact, in February, we were able to utilize capacity on our corporate credit facility to refinance the 3-property Commonwealth portfolio, which will save us over $700,000 in annual debt service payment. Further, in January, we redeemed $10 million of the preferred equity that encumbers our Commonwealth portfolio. This move further reduces our portfolio carried and fixed charges by $650,000 per year. Throughout 2022, we will leave no stone unturned when it comes to ways to strengthen and streamline our capital structure. I will now turn it over to Adlai Chester, our Chief Investment Officer.

Thanks, Scott. As a reminder, 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. Our triple-net portfolio continues to struggle as operators work to rebuild census as well as deal with increased operating costs, specifically on the labor side of things. As a result, our stabilized portfolio EBITDARM coverage performed slightly below 1.0x for the period ended September 30, 2021. As of September 30, our trailing 12-month occupancy for the stabilized triple-net assets and stabilized SHOP portfolio was 75% and 76%, respectively, while our medical office portfolio stabilized occupancy stood at 81%. In addition to occupancy, it is important to highlight that our SHOP operators have been successful in increasing resident rental rates over the last 18 months. For the 12-month period ended September 30, 2021, the average monthly rate paid by residents in our stabilized SHOP portfolio was up 4.2% versus the period ended September 30, 2020. We expect to see this rate increase trend continue as our operators, along with the majority of senior housing providers in the industry, raised rates in 2022 at a higher percentage than historical norms. Most of our partners have implemented rate increases in the 5% to 10% range for 2022 to help offset significant increases in operating expenses. As Scott noted earlier in the call, we disposed of over $200 million in assets in 2021, with roughly $100 million of that activity occurring in the fourth quarter. This portfolio pruning process will likely continue in 2022 as we look to further optimize our portfolio with a go-forward focus on assets and operators that are a strategic fit for Invesque. The sale to Ensign that was announced in November was a competitive process that resulted in favorable pricing for a portfolio of majority skilled nursing assets. The team at Ensign was familiar with all assets acquired, given their ongoing operation of 4 of the 5 properties and closed quickly and efficiently. With the closing of the sale, we closed out a relationship with Ensign and Pennant, and we wish both of them continued success in the future. As Scott touched on earlier this month, we closed on the sale of a Harrisburg, Pennsylvania assisted living and memory care community to a Northeast operator that is expanding their operating platform into Pennsylvania. The community was managed by Commonwealth Senior Living prior to the sale and was 1 of only 2 assets in Pennsylvania managed by Commonwealth. Despite a conversion of the lower level of the community to memory care last year, property continued to struggle financially and was ultimately determined to be nonstrategic for Invesque and Commonwealth. I'm really pleased to announce that we acquired another standalone memory care community with Constant Care in February. The community in Wyoming, Michigan, part of the Grand Rapids MSA, was bought for approximately $12.5 million. Pat Anderson and his team at Constant Care have done a great job building their platform and are one of the best memory care operators in the country. We now have a portfolio of 9 assets with Constant Care and as part of the Michigan acquisition, we consolidated all properties into a single master lease with a 15-year term and 2 5-year new renewal options. We look forward to working with the Constant Care team for the long haul and will likely look to grow this relationship further if good opportunities present themselves. As we have stated in the past, we focus on structuring our triple-net portfolio and master lease structures to provide greater cash flow protection. And today, over 93% of our triple-net portfolio rent is in cross-collateralized master lease structures with respect to tenants. As we highlighted last quarter, our strategic reposition has 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 just over 5 years ago. Further increase in exposure to private pay assets will likely occur in the next 12 to 24 months as we continue our focus on asset management and portfolio optimization. During the call last quarter, I provided an update with respect to the tremendous amount of capital deployed by companies in our space. The transaction market for senior housing and skilled nursing remains robust, which helped us to accomplish our dispositions over the course of 2021. Year-to-date in 2022, a greater emphasis has been placed on investors' restructuring relationships with triple-net tenants in senior housing and skilled nursing. There are several contributing factors driving these restructurings, which generally relate to COVID-19. New variants have been disruptive to staffing resulted in increased costs and have slowed movements. State mandated operating restrictions have also constrained available beds. We also believe that additional U.S. government relief is unlikely. These are all factors that impact our portfolio just like our other triple-net portfolios in our industry. However, year-to-date, we have continued to receive timely payments from our operating partners with no disruptions. We remain in constant dialogue with our SHOP and triple-net operating partners to understand the industry's recovery and how we can contribute to reaching and exceeding pre-pandemic performance. With that, I would like to thank everyone for joining the call. And operator, please open the line for questions.

[Operator Instructions] And we'll take our first question from Joanne Chen with BMO Capital Markets.

Congrats on a very, very busy year. I'm sure you guys have been working very hard on with all the capital recycling.

Thank you.

But just wondering how much more opportunities, I guess, within your portfolio? Do you see -- I guess, should we think about for 2022 in terms of more dispositions? And how would you recycle that capital? I know you guys have done a great job with improving the balance sheet. But kind of just, I guess, the deployment perhaps acquisition opportunities that you're seeing now that look interesting?

Yes. So let me take that as 2 parts. One, in terms of what you expect going forward, I don't want to draw line in the sand or give a number of what to expect in terms of the dispositions, but we had a robust year in 2021. I had said over $200 million in dispositions more than half coming in Q4. And if you see the trajectory of beginning of 2021 versus end of 2021, you see a ramp-up in dispositions toward the end of the year. And I think it is reasonable to expect that we will continue to announce additional dispositions of noncore assets. So again, I want to emphasize we're focusing on -- we're not selling off the entire portfolio nor are we selling off valuations below what we think is reasonable and fair in our expectations. So we're not in a hurry to dispose. What we're doing is we're trying to be really smart and say, where do we want to grow, who are those operators, what are the right opportunities and streamline instead of having such a broad and diverse portfolio. In terms of recycling of the capital and what we're going to do with it, we think about every dollar as a fiduciary for our investors and every dollar for that matter, every penny is rightly important. We just look at what is the highest and best use of that dollar. Do we see acquisition opportunities? We do, but we're being very selective. As we announced, we did an acquisition with Constant Care because they're one of our core operators that we'd like to continue to grow with. And I think you should expect to see more of that. We also talked about and Higgs talked about this, how much we delevered during 2021. And I think you should continue to see that activity. As I said, 2 primary areas of focus is simplifying our story, i.e., our portfolio and simplifying our balance sheet.

Got it. That's helpful. And I guess you did mention, I guess, the whole industry is on the staffing front, some challenges. So how should we be thinking about, I guess, margins in 2022 given that impact? I mean I know you guys are getting -- with the reopening, you're getting the top line growth, but just how should we think about that?

Yes. So there's a couple of things there, and I'll specifically address margin. First, we are seeing occupancy increases. So your right top line growth in terms of the occupancy driver is positive. It's slow. It's not month-over-month massive increases, but it's certainly trending in the right direction. Each month is getting better, and I expect that to continue throughout the year. I think the most important response to your question and it's an important one is we're continuing to drive top line growth. And when I say we at top one, Commonwealth, our wholly-owned operating subsidiary, and two, our operating partners, by increasing rental rates for the underlying tenants, and that's really important, the residents, I should say. There's been a fairly sizable increase in year-over-year rental rates because the market understands that labor is such an issue. And the only way to make this a long-term sustainable viable business model and preserve the margins, which is what you specifically asked about, Joanne, is to make sure that your rent increases are commensurate with or greater than the increases in labor costs.

Sure. Okay. No, that's super helpful. And maybe just one last quick one from me. I guess by market, where are you seeing the quickest, I guess, in terms of the recovery, the strength for you guys right now within your portfolio?

It really isn't specific to a market. It would be hard to say geographically one part of the country is coming back faster or one particular type of asset is coming back faster. It really is asset specific. It really is -- even within geographic locales, you see some facilities increasing occupancy faster than others. I think, as a general proposition, we're probably seeing the senior housing side of the equation come back faster than the skilled nursing side of the equation. But if your question was more specific to geography, I think that's very hard.

We'll now take our next question from Tal Woolley with National Bank Financial.