Invesque Q2 2023 Earnings Call Transcript

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August 14, 2023

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to Invesque's Second Quarter 2023 Conference Call. I will now turn the call over to Scott White, Chief Executive Officer. Please go ahead, Mr. White.

Speaker 1

Thank you, operator, and thank you all for joining our Q2 2023 conference call. I'm joined today by Adlai Chester, our Chief Financial Officer and Executive Vice President of Investments. The 2nd quarter earnings release, financial statements and MD and 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.

Speaker 1

M. Eastern Time on August 28. As always, 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.

Speaker 1

As we discuss our performance, Please bear in mind that all amounts are in U. S. Dollars unless otherwise specified. With that, I'll turn to some of the highlights for the Q2. Our team was very busy continuing to execute on our simplification strategy.

Speaker 1

The highlight of the quarter was the completion of the SimCare portfolio sale For $121,000,000 which we previewed on our last call, 7 of the 8 assets were sold on June 1 with the final asset closing after the quarter ended July. This transaction represents significant progress in the reduction of our skilled nursing exposure and was a major priority for the company. Following the sale, Invesque no longer leases any assets to Semcare and we have reduced our In addition to the SimCare sale and as announced on our earnings call in May, We sold 1 medical office building during the Q2. The sale of the MetroWest Medical Center in Orlando, Florida for $6,400,000 occurred in April and represents another step in simplifying our portfolio and our balance sheet as we We have 2 remaining medical office buildings and are actively marketing both of them for sale. I expect that they will be sold within the next 12 months.

Speaker 1

We touched on this briefly last quarter, But at the beginning of the Q2, we added a new operator, Chapters Living, to our triple net portfolio. The Chapters Living team signed a long term lease for 3 memory care communities located in Texas and Arkansas that were previously leased to another operator. It has been more than 90 days since the transition and we're pleased with the progress Chapter 11 has made with implementing policies and processes that should result in improved operations and financial results. I'm excited about having Chad Reis Living as one of our operators and look forward to see The 2nd quarter results for our ShopRev operators were solid, including continued growth in Our Commonwealth and Heritage portfolios have both hit and maintained Pre pandemic occupancy levels, an achievement few operators in the industry have achieved to date. The Commonwealth portfolio Has seen additional occupancy growth so far in the Q3 and I'm hopeful that the steady growth we have seen over the last 4 quarters will continue for the rest of the year and into 2024.

Speaker 1

Our operators have not only been successful growing census, but also revenue per resident. Specifically, Commonwealth grew year over year average revenue per resident day by 6% And Heritage achieved growth of 5.2%. Additionally, Commonwealth and Heritage continue to see improvements in the availability and retention staffing, which has been an ongoing challenge for more than 3 years. We expect this will result in more modest operating expense growth going forward. We remain bullish on the seniors housing industry and believe that the efforts we have taken over the last 2 to 3 years to focus our portfolio specifically on this asset type will prove beneficial in the coming years as the demand for seniors housing reaches a level we have never seen before.

Speaker 1

As we have highlighted a number of times recently, the company strategically set out to simplify with a focus on pruning the portfolio and improving our balance sheet. We made significant progress on the portfolio front via dispositions and operator transitions and are now hyper focused on the balance sheet. I'll now turn the call over to Adlai, who as of August 1, has assumed the role of Chief Financial Officer in addition to EVP of Investments. Abhay will review our financial results for the quarter and touch on a few noteworthy items relating to our KeyBanc credit facility. Lastly, He'll provide an update on transaction activity in our company.

Speaker 2

Thank you, Scott. For the 3 months ended June 30, FFO and AFFO were each $0.10 per share. Consistent with themes from prior quarters, our priority is to delever and streamline our capital stack. The sales of SimCare assets has allowed us to do both of those things. Between March 31st June 30th, We paid down our corporate credit facility by over $122,000,000 Subsequent to the Q2, we repaid an additional $19,400,000 as part of the sale of the final This brought the total pay down to over $141,000,000 We believe these transactions substantially de risks the portfolio that supports our corporate credit facility and positions us to work collaboratively with the bank group to extend the pending maturity of our corporate credit facility.

Speaker 2

On that note, we are currently working in earnest with KeyBanc and the remainder of the Bank Group on an extension of the credit facility, which currently matures at the end of 2023. As part of the negotiation, we have agreed to restrictions on the amount of September 30, 2023 convertible debentures that can be repaid. As an amendment to our current credit agreement, we agree that no more than 10% of the outstanding principal balance of those debentures will be repaid later this quarter. This is a reduction in what had previously been agreed upon with debenture holders, but refinancing and extending the KeyBanc credit facility is our highest priority. Our belief is that this was a necessary concession to lay the framework for finalizing a deal with Key.

Speaker 2

We realize that this is disappointing news to the venture holders who have long supported Invesque. But as a management team, we believe that it is our highest priority to ensure that the company is on solid financial footing, which starts with our senior lending partners. We will continue to work in good faith with all of our stakeholders, including the debenture holders, and we'll utilize all resources at our disposal To ensure that they are treated equitably as we continue to stabilize our capital structure. I am pleased to report that late Friday of last week, we executed a non binding term sheet from KeyBanc And the other participating lenders. The term sheet contemplates extending the credit facility to March 31, 2025.

Speaker 2

We will be working diligently over the coming weeks to document and work towards the closing of the extension. Moving on to our portfolio performance. Our stabilized portfolio EBITDARM Coverage remained just below 1.0x for the period ended March 31, 2023. As of March 31, the trailing 12 month occupancy for the stabilized triple net assets We saw solid traction during the quarter, which translated into favorable operating results. Occupancy continued its steady gains with a sequential increase of 80 basis points.

Speaker 2

The combination of occupancy growth and rate growth highlighted by Scott led NOI to increase by 5.5% sequentially. Staffing in many markets has stabilized and our shop operators feel good about where things are headed in the coming months. The transactions highlighted earlier in the call and in our press release from this morning represent meaningful progress towards achieving our stated goal of becoming a predominantly private based senior housing company, But they don't represent the culmination of that strategy. You should expect to see us continue to proactively manage our remaining portfolio. This can and will include identifying non core assets or those that we think may work against our goal of growing and stabilizing earnings.

Speaker 2

The process for identifying these assets is ongoing, and I anticipate we will have further transactions to tell you about in future earnings calls. With that, I will turn it back to the operator to open the line for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from Tal Woolley with National Bank Financial. Please go ahead.

Speaker 3

Hey, good morning.

Speaker 2

Good morning, Tal.

Speaker 3

Good morning. Just wondering, I'd like if you can talk A little bit about the pending credit facility extension. Can you talk to sort of about what Kind of amount is in principle you're discussing and what sort of rates we should be expecting on the refinance?

Speaker 2

We're still negotiating on that piece, Sal. You should expect the amount that's outstanding at $630,000,000 We're not going to see any further substantial pay down, maybe a little slight one, but for the most part, in that call it $200,000,000 range In terms of the interest rate, that's still a negotiation that we haven't landed on yet. Okay.

Speaker 3

And the debenture modification, so you can proceed with, I believe the number was $5,000,000 That's what you're able to do right now.

Speaker 2

Yes.

Speaker 3

And is that Can you still use that approved plan by the debenture holders like so if it's $5,000,000 now, but then things free up in the future like Can you repay those or do you have to go back for approval? I'm just trying to understand the mechanics here on how this works.

Speaker 2

Yes. So we're in active conversations with the venture holders at this point in time trying to land on what that's going to look like. But as far as the relationship to Key, they're allowing the 10% pay down now, nothing further. So if we were going to pay any more than that, we'd have to go back

Speaker 3

Okay. I mean worst case scenario like I guess like you could just like once you're in the clear with the lenders, You could just go to the market and buy down if you wanted to as well.

Speaker 2

Correct.

Speaker 3

But it's beyond the existing terms of the debenture, not the modified terms.

Speaker 1

What do you mean by that?

Speaker 3

Sorry, I guess, like I guess what I'm trying to understand is like if you've got the $5,000,000 pay down now, you're planning to pay down I think $22,000,000 or something like that. If you pay down 5 now and you do the other 17 later once you're in the clear with the debenture holders, do you have to go

Speaker 1

To the debenture holders or the keypad?

Speaker 3

Yes, to the debenture holders.

Speaker 1

So we're in current discussions with the debenture holders. I think it's too early to share where we end up with that.

Speaker 3

Okay. So it's still something in process. Got it. And then I guess with the disposition plan, are there Do you have like sort of a visibility to kind of like what your run rate NOI would be from the different segments of the business, once you're sort of done with the dispositions?

Speaker 2

I think we have pretty good

Speaker 1

Go ahead, Adam.

Speaker 2

Sorry. No, go ahead. Go ahead.

Speaker 1

Yes. I was going to say We do. I mean, we've had a cash projection plan and NOI plan that we update each year for the last as long as the business We have a 3 5 year projection that we've been executing on. And there haven't been big surprises in terms of as you've noticed probably from our earnings release There aren't big surprises in the ongoing one rate NOI as we sell off assets is obviously reduced, but there aren't sort of Meaningful peaks of valleys.

Speaker 3

Okay. Where would you peg run rate NOI right now?

Speaker 2

Yes, Tal, that's something I could have On your modeling, yes. We haven't historically disclosed specifically forward rate NOI. But with that said, I think I can now bridge you to what you're

Speaker 3

And then just lastly, you've got like some other parts of your cash structure that are Like I'm thinking of like the preferred equity investment for Magnetar that are costly. And I'm just wondering, is there a way to like refinance those or refinance them out at some point down the road.

Speaker 1

Sure. Yes, absolutely. I mean, as part of our overall strategy, we've been wanting to simplify our cap stack. I will tell you that Costly is a relative concept, but as Andrew says, it's all of a sudden a lot of our financing

Speaker 3

That's true.

Speaker 1

If you listen to our Call from a year ago, I told you there were certain things we were chasing to eliminate because of their relative cost. Now as I look in the rearview mirror, I'm less anxious Just to eliminate those because they do have locked in and even what you just referred to the McIntyre press across that all the classes of press. So yes, Some that are more and less expensive, but we don't have the right to just take out a specific class. As you look at the average cost of those presses, they're not very expensive relative to the cost of capital today.

Speaker 2

Okay.

Speaker 3

And then just the last thing on your seniors housing portfolio, How are you finding like you said you've recovered to occupancy Sorry, pre COVID occupancy.

Speaker 1

Yes.

Speaker 2

Do you

Speaker 3

have an idea of like what sort of Occupancy growth sort of reasonable to expect from this point forward. And also just wanted to ask you about how you're finding staffing and things like that

Speaker 1

Yes. So on occupancy growth, I think it's going to be a bit more muted relative to what we've seen over the last couple of quarters, right, You had a big valley, so then you worked your way back to the peak. So on a quarter over quarter basis, I do think you're going to see more of a leveling off as As it relates to staffing, it is definitely improving. It continues to be a challenge. There's no doubt about that.

Speaker 1

As you look across The U. S. Labor market, forget about our industries. Staffing is still a challenge across all industries and our industry has historically always Had a challenge with staffing. With that said, as we mentioned in our remarks, the cost of attracting and retaining

Speaker 3

Okay. And In the triple net portfolio, you've done so much work transitioning operators. Do you feel like at this point in time like The operator that you've got, everyone's on steady ground now. And we're not expecting any more operator transitions going forward?

Speaker 1

I think that's fair to say. The only thing I would caveat is we continue to look at the portfolio for selective So I don't expect that you'll see big operator changes. But as we announced at the beginning of our Simplification strategy, not only were we looking to focus the portfolio on seniors housing, Around the margin, there are some smaller relationships that we have. And as we try to focus our attention, our energy on the highest and best uses, I think there is It's a opportunity to continue to reduce the number of operator relationships and number of disparate portfolios we have.

Speaker 3

Got it. Okay. That's great. Thanks, gentlemen. I appreciate it.

Speaker 1

Wonderful. Thanks, Sal. Have a great day.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your

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Invesque Q2 2023
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