Invesque Inc. (IVQ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Invesque's Fourth Quarter 2022 Conference Call. Today's call is being recorded. I will now turn the call over to Scott Higgs, Chief Financial Officer. Please go ahead, Mr. Higgs.

Thank you. Good morning, and thank you for joining our fourth quarter 2022 conference call. I'm joined today by Scott White, our Chairman and Chief Executive Officer; and Adlai Chester, our Chief Investment Officer. Following our prepared remarks, we will open the line for questions. The fourth quarter 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 23. Please remember that today's call may include forward-looking statements regarding 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 unless otherwise specified. I will now turn the call over to Scott White.

Good morning, all, and thank you for joining the call. 2022 was a transformational year for Invesque, a transformation, which is ongoing in 2023, which I'm excited to talk about further during this call. Over the course of the year, we sold 24 nonstrategic assets for more than $220 million, and are well on our way to having a predominantly private pay seniors housing focused portfolio. An important step in the shift to private pay seniors housing was the sale of our medical office building portfolio. As you may recall, we sold the majority of our medical office portfolio last summer, with 1 remaining Canadian asset that was separately marketed for sale. And in the fourth quarter of 2022, we sold this final medical office building in Canada for approximately $6 million. This bifurcated approach to selling the Canadian medical offices led to higher net proceeds from sale than if we had sold the entire portfolio together. Additionally, I'm pleased to announce that we have executed an agreement to sell the MetroWest medical office building in Orlando, Florida, for $6.4 million. The buyer is in the final stages of their due diligence period, and we expect the sale to occur in the next month or 2. And while we've not finalized an agreement to sell our final 2 medical office buildings, productive discussions are ongoing. As of year-end, 75% of our properties are seniors housing assets, offering independent living, assisted living and memory care services. The remaining 25% are skilled nursing facilities or medical office buildings. This represents a drastic shift in portfolio composition compared to where we sat 24 months ago. Invesque remains focused on executing on the simplification plan, and we expect continued progress over the next few months. On that note, I'm excited to announce that we've executed a purchase and sale agreement to sell the 8 skilled nursing facilities in Illinois currently leased to SymCare for $125 million. This transaction represents a significant portion of our remaining skilled nursing portfolio. And, although subject to ongoing standard due diligence conditions, we expect to close on this sale during the second quarter of 2023. Following completion of the sale, the company will have only 9 skilled nursing facilities remaining in the portfolio, and we anticipate that 80% of our company NOI will be generated from seniors housing investments. Switching gears to touch on financial performance in 2022. We continue to be pleased with our SHOP portfolio performance, especially the Commonwealth Senior Living portfolio that we acquired in 2019. As you likely recall, Commonwealth is a regional operator in the Mid-Atlantic, currently managing 36 communities, 28 of which are owned by Invesque. Commonwealth successfully rebounded to prepandemic occupancy levels in the second half of 2022, and gained more than 600 basis points of occupancy from the first quarter to the fourth quarter. The company continues to be successful in growing resident rental rates to offset continued expense pressures seen in labor, utilities and food costs. We're also optimistic about progress made on the hiring and retention front at Commonwealth central offices and the 36 managed communities, and we're looking forward to continued improvements in 2023. Many of our other seniors housing partners are seeing similar trends, and I continue to be optimistic about the growing demand for our industry in the coming years and the opportunities that demand will create for investors in the space. Before I turn the call over to Scott, I'd like to highlight that for the fourth year in a row, Invesque has been named one of the best places to work in Indiana. When we created this company 7 years ago, it was crucial to the management team that we created an environment with a strong culture, shared values and where people truly wanted to work. I remain extremely proud of the culture we have created, and I'm happy that Invesque continues to be recognized for these efforts. With that, I'll turn the call back to Scott to touch on our financial results.

Thank you, Scott. For the 3 months ending December 31, FFO was $0.12 per share and AFFO was $0.10 per share. And for fiscal year 2022, FFO was $0.42 per share and AFFO was $0.39 per share. From a finance perspective, 2022 is about delevering and derisking our balance sheet. Through asset sales and organic cash flow, our team has strategically allocated cash to repay debt and streamline our capital stack. For the year ended 2022, we repaid $133 million in consolidated indebtedness and $53 million in JV indebtedness. Over the past 8 quarters, the company's leverage has been reduced by approximately 450 basis points. Additionally, in 2022, we utilized available funds to retire approximately $10 million of the preferred equity that encumbers the Commonwealth Senior Living portfolio. Consistent with the strategy that we have previously disclosed, we continue to retire both common equity and convertible debentures through our normal course issuer bid. This initiative continues to be among our best uses of capital. Since the inception of our normal course issuer bid through December 31, 2022, we've retired nearly 588,000 common equity shares at an average price of $1.69 per share and 1,660,000 convertible debenture units averaging 81% of face value. Looking ahead to 2023, our finance team will continue to implement the delevering and derisking strategy as we continue to pay down debt, address near-term maturities and manage the escalating interest rate environment. Our team prides itself on maintaining a number of mutually beneficial relationships with our industry financing sources. As we emerge from the pandemic, a number of lenders have reached out looking for new owners and operators for assets within their portfolio. We view this as an opportunity to utilize our banking and operational relationships to create shareholder value. Assuming the opportunities in the right market and fits our go-forward senior housing strategy, we may look to acquire ownership with limited equity out of pocket, bringing in a preferred equity partner to turn around and stabilize operations. On December 5, 2022, we acquired a loan encumbering a 43-bed memory care facility located in Carrollton, Texas. Subsequent to year-end, we have entered into an agreement to acquire the property and lease the community to Constant Care Management Company, one of our preferred operating partners focused on memory care. We're very excited about this opportunity and look forward to working with Constant Care on this project. I will now turn things over to Adlai Chester, our Chief Investment Officer.

Thank you, Scott. Our stabilized portfolio EBITDARM coverage remained just under 1.0x for the period ended September 30, 2022. As of September 30, the trailing 12-month occupancy for the stabilized triple-net assets and stabilized SHOP portfolio was 77% and 78%, respectively. As noted for the last 2 quarters, we will not be providing financial metrics on the 3 remaining medical office assets as they are designated as held for sale and make up a very small portion of our portfolio going forward. As Scott touched on, we saw positive trends from our Commonwealth and other SHOP operators throughout 2022. Many of our assets have bounced back to prepandemic occupancy levels and a number of assets in our portfolio have even hit 100% occupancy, an impressive feat in our industry. According to the National Investment Center, or NIC, industry-wide senior housing occupancy reached 82% in the fourth quarter, about 5 percentage points below the occupancy level prior to the pandemic. As of December, our SHOP portfolio achieved 81% occupancy. While that marginally trails the industry, it is actually 1 percentage point higher than the portfolio's occupancy back in February 2020. The pace of occupancy recovery in 2022 was encouraging, but we have observed data that would suggest industry-wide occupancy declined slightly in the first quarter. Despite the broader trend, we expect our SHOP portfolio will post another modest occupancy gain. Most of our senior housing operators increased residence rates by an additional 5% to 10% this year, continuing a trend of larger-than-normal increases over the last 24 months. These increases have been met with minimal resistance from resident families, which highlights the critical value of services that our operating partners provide. The combination of improved occupancy and rate growth have helped drive net operating income closer to prepandemic levels. We don't see that as the end game, though. When we acquired the Commonwealth portfolio and brought the communities formerly operated by Greenfield under the Commonwealth umbrella, we believe there would be considerable growth in net operating income. Our expectation is that net operating income will continue to grow in 2023. Next, I'd like to provide some additional commentary about the sales transactions that we expect to accomplish over the next several months. The sale of the SymCare portfolio represents a substantial accomplishment toward becoming a predominantly private pay senior housing owner. Recall that we consummated a restructuring transaction with SymCare in 2021, in which we sold 4 properties and retenanted another 4 before amending and restating our master lease with SymCare. After this transaction was complete, we expected the fundamentals of skilled nursing operations to rebound similar to our senior housing investments. Data from NIC and the Centers for Medicare and Medicaid Services show that the recovery in occupancy is about half that of seniors housing. Additionally, the growth in Medicare and Medicaid rates have been substantially below the pace of inflation. Skilled nursing operators face real challenges from not being able to directly pass along their increased cost to resident and patient families the way that senior housing operators can. These factors, in addition to the substantial expense pressures, like those we've observed in senior housing, led to the closure of 135 skilled nursing facilities in 2022. Additionally, other large owners and operators of skilled nursing facilities are seeing ongoing lease restructurings to account for the delay in recovery. This all set a tough backdrop that ultimately continue to push us towards exiting our skilled nursing assets. In spite of the challenges to operating fundamentals that I just described, we've been surprised to see asset prices on a per bed or per unit basis have not dropped. According to NIC data, average prices have remained fairly consistent for the past 10 years. Our sale of SymCare portfolio represents a price per bed of $72,000, which we think compares favorably to similar transactions in Illinois at $65,000 per bed, and in line with the national average of around $80,000 per bed. Similar to several of the transactions that we accomplished in 2022, we spoke to our network of friends in the industry to identify an efficient and appropriately priced transaction. As Scott highlighted, this will be a transformational deal for Invesque. Finally, I'd like to comment on our remaining medical office portfolio sales. Last year, we were successful in transacting the sale of the first 10 properties with logical groups with whom we were familiar with. But that's not our only strategy to maximize value in the sales transaction. The sale of MetroWest was part of a competitive process that involved a long list of buyers that specialize in off-campus medical office buildings. We are conducting a similar competitive process with an adviser to identify the best value for the remaining upstate New York properties. The trade-off with this approach is that a broad competitive process can take longer, but we think it is the right approach in these 2 situations to maximize the value of the remaining properties. That concludes our prepared remarks for today's call. Operator, please open the line for questions.

[Operator Instructions] We'll hear from Tal Woolley from National Bank Financial.

Just with the proposed SymCare sale, can we just get a little bit of color about how much secured debt there is outstanding against those assets?

So those assets are on our line of credit. So as a result, substantially all of the proceeds from the sale will go to pay down the line.

Perfect. All right. And then in the context -- I think you still have some money out lent to SymCare. Do you expect to receive the full proceeds back from that now and with the sale process ongoing?

So as part of the sales process, we're still in discussions and negotiations with the various parties at the table, and we're not in a position to announce any of that yet.

Okay. And I guess just with a lot of refinancing work to do over the next stretch here, I guess let's talk about 2 things. Just where you see cost of debt ultimately landing when you get past refinancing the credit facility and the debentures? And then like where -- what's sort of the ideal mix on the liability side between credit facilities, secured debt and other unsecured options?