Invesque Inc.

Thank you, Sheryl. Good morning, everyone, and thanks for joining the call.

With me today are Scott White, our Chairman and CEO; and Adlai Chester, our CIO. Scott will kick things off discussing our activity for the quarter, color around our portfolio and some overall industry news and trends.

I will then cover our second quarter financial results. And Adlai will recap our portfolio performance, recently announced investments and strategic efforts before starting the Q&A portion of the call.

The second quarter 2019 earnings release, financial statements and MD&A are available on our website, and a replay of this call will be available from 1 p.m. today until midnight on August 22.

Before we get started, 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've 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, thank you all for joining our second quarter earnings call. Since our last call just 90 days ago, we have dramatically strengthened the look, makeup and portfolio mix of Invesque with the acquisition of Commonwealth Senior Living.

The Commonwealth acquisition is comprised of 20 communities with over 1,400 private pay independent living, assisted living and memory care units located in Virginia and Pennsylvania. We are acquiring the Commonwealth portfolio at approximately $236,000 per unit which represents a 20% discount to our estimate of replacement cost.

We have long believed our basis to replacement costs is one of the more important considerations when we acquire assets. Along with the communities we acquired the Commonwealth management company as part of the initial closing earlier this month.

Richard Brewer, CEO of Commonwealth Senior Living along with his senior management team and all current employees will remain with Commonwealth and continue to manage the communities. The Commonwealth transaction now positions Invesque as a predominantly private pay healthcare, real estate investment company with approximately 55% of our pro forma NOI coming from seniors' housing by the end of 2019 The Commonwealth transaction also allows for us to provide a very differentiated vertically integrated operating and property management model.

We have added in-house operational expertise with Richard to his teams nearly 20-years of experience. We expect they will work closely with some of our other best in class operators to share insights and best practices.

We believe this collaboration will drive performance and maximize profitability across our nearly $1 billion seniors' housing portfolio. We'll also look to utilize Commonwealth to reposition certain assets that are better strategic fit for the Commonwealth team such as the Greenfield transition we just announced.

After the completion of the Greenfield transition, Commonwealth will become the largest operator of seniors' housing in Virginia and one of the largest operators in the Mid-Atlantic region. Commonwealth will also become our largest source of NOI representing approximately 26% of pro forma NOI at the end of the year.

Adlai will touch on the Greenfield transition later in the call. However, I want to highlight this is an important transaction for us for so many reasons.

The ability to strengthen our existing portfolio by transitioning operators with a key strategic reason for the acquisition of an operating and management company. As I mentioned last quarter one of our areas of focus for the remainder of 2019 will be managing and maximizing our existing portfolio.

We have grown our portfolio over four-fold since our IPO a little over three years ago. As we grow, we constantly monitor our portfolio to assure we are achieving our long-term goal of building a world-class portfolio with operators who can scale.

One important aspect of this asset management initiative is to opportunistically divest assets and redeploy capital. The Magnetar JV we announced during the second quarter is an example of capitalizing on the opportunity to raise attractively price capital through a partial disposition to continue our growth.

Now that I've discussed the initiatives in our portfolio, let me comment on some of the important industry themes. Supply continues to be hot topic in the seniors’ housing industry.

As we noted last quarter, we have observed a recent drop-off in new construction starts. The recently published second quarter NIC MAP data support our observation with total construction as a percent of existing inventory dropping 100 basis points from its peak at the end of 2017.

Additionally, we are encouraged by the decline in development starts. The developers broke ground on just 2.6% of product on an annualized basis in the first half of 2019 down from its highest 5% between 2014 and 2018.

Development continues to be more heavily weighted to the top MSAs. While we will very carefully consider unique opportunities in the top MSAs, we continue to be much more focused on midsize markets.

By focusing our efforts on midsize markets, we continue to source sizable, scalable and high-quality opportunities at a discount replacement costs just like we did with the Commonwealth transaction. Our regional focus has allowed us to avoid exposure to elevated supply, and capitalize on new arbitrage buying existing stabilized assets for cheaper annual cost development.

We'll still invest in development like you've seen us do with Ellipsis we will be very selective in the opportunities we choose. While we do not believe supply concerns are thing of the past, we continue to believe the outlook is improving and should improve in 2021 and onwards.

Demand should continue to trend higher due to increased penetration from demographic tailwinds. This demand will trend consistently higher to the next decade with the growing faction of the 80 plus population.

From the skilled nursing front, we remain cautiously optimistic about our portfolio of post acute focus skilled nursing facilities. The centers for Medicare and Medicaid services recently finalized the net Medicare SNF rate update for the 2020 fiscal year beginning October 1, 2019.

Under the terms of the 2020 final rule, CMS will increase Medicare payments by over $850 million or 2.4% to skilled nursing facilities. We believe this market rate update will be an important step in improving the environment for SNF operators.

Skilled nursing facilities remain the lowest-cost setting of care for a large subset of patients and the final rule strengthens the Medicare program by better aligning payment rates with the cost of providing care. We’re also encouraged by recent announcement that Illinois will increase Medicaid funding to skilled nursing facilities by $240 million in the next fiscal year.

Of this $240 million, a $170 million of the increase funding will go towards updating Medicaid reimbursements for a variety of support services from food to maintenance. Given that some of these reimbursements have not been revised since 1999, we view this as a very favorable outcome for Symphony our largest skilled nursing operator.

Finally, we believe the upcoming implementation of the new case mix model PDPM, this October should help drive profitability for sophisticated operators that are focused on high acuity patients. PDPM will shift payment incentives away from the volume of therapy provided and more towards patient acuity.

Skilled nursing providers particularly those in our portfolio will focus on group therapy will be able to capitalize on both cost savings and improved patient outcomes. We believe the increase CMS market rates, the increase Medicaid funding in Illinois, and the implementation of PDPM provide for a favorable backdrop for increased profitability over the next few years.

I'm very excited with what we have accomplished year-to-date. We have executed on our robust pipeline and now are turning our focus towards enhancing the value of our comp portfolio.

With that, I'll pass to Scott Higgs to talk about our second quarter performance and recent capital markets activity.

Thanks Scott. Adjusting for deal cost for the quarter ending June 30, FFO was $0.20 per share and AFFO was $0.19 per share.

Our effective dividend cash payout ratio when adjusted for participation was approximately 81% for the three-month period. During the second quarter, we recognized fair value changes to investment property on both the consolidated and joint venture portfolio.

The changes were the result of two primary factors. First, we continually assess the value of our portfolio.

We analyzed changes in the cap environment use to value assets that are comparable to our portfolio. We update our projections for net operating income, and we evaluate other factors that impact the value of our investment property.

Second, we recognize the tenant inducement asset primarily associated with loans issued and committed to at below market rates to select operators. However, we do not anticipate any impact to FFO or AFFO for this change on a go forward basis.

On the debt front, our average debt maturity remained consistent at approximately 4.7 years as of the end of the quarter with only 14% of our debt rolling over the next three years. With volatility and interest rates providing for an extremely favorable debt market, we were very active over the last few months in refinancing debt at lower rates and to further extend our maturities.

Also we implemented a series of interest rate swaps to use the yield curve in our favor to generate interest and cash flow savings and help to lower our effective interest rate by 20 basis points from the first quarter. One example of capitalizing on market pricing including blocking in the interest rate of our new credit facility underlying the Commonwealth transaction at a very attractive 3.84% throughout its initial five-year term which will also help to blend down our overall average borrowing rate.

We will continue to refresh our debt stag strategically and enhance the profile for both Invesque and our partners to strengthen our platform over the long-term. Let me expand on the balance sheet out of the Commonwealth transaction.

Upon closing of the second tranche, the Commonwealth transaction consideration will consist of the new $176 million facility I mentioned earlier, the assumption of approximately 44 million of mortgage debt, the issuance of approximately 65 million of convertible preferred shares, and the remainder funded with cash. The convertible preferred shares of a conversion price of 9.75 thus allowing us to effectuate the transaction at a better cost of capital than our current stock price could imply.

The structure of the transaction combined with a favorable debt market pricing will allow us to consummate the transaction at an excess of 200 basis points spread to a blended cost of capital on the deal. We anticipate that the Commonwealth transaction will be $0.10 to $0.12 per share accretive to 2020 FFO and $0.06 to $0.08 per share accretive to 2020 AFFO.

More importantly, the assets that we're buying are high-quality private pay asset which will enhance the quality of our cash flow and portfolio. Although, our leverage is increasing with this transaction, we’re comfortable at this level for the interim period.

We're focused on balancing growth and diversification with the appropriate leverage and we have a bias to reduce leverage over time. We have significantly lowered the risk profile of the company which will allow us to delever organically.

On the capital front, we recently announced that we raised $15 million through a private placement with Magnetar. Preferred shares carry similar terms to prior raises of convertible preferred we've done with them as a counterparty except for the terms noted in the press release from July 23.

Combining this recent raise with prior convertible preferred issuances to Magnetar, the total convertible preferred outstanding with them is roughly $86 million with a $9.75 per share conversion price and a blended dividend rate of approximately 6.3%. With that, I'll pass it over to Adlai to discuss our portfolio performance and investment activity.

Thank you, Scott. The performance of our stabilized triple net portfolio remains consistent with previous quarters.

On a trailing 12 month basis, as of March 31, our EBITDAR and EBITDARM coverage ratios were 1.2 times and 1.5 times, respectively. Our trailing 12-months occupancy as of March 31, stood 85% for our triple net assets and 89% for our stabilized JV assets.

For the MOB portfolio, stabilized occupancy stood at 91%. As Scott noted earlier, yesterday we announced that we have entered into an agreement to transition 13 assets currently operated by Greenfield to a group of existing operators, where we are already have significant relationships.

We are confident in their ability to drive performance in the former Greenfield portfolio by implementing their operational equities and creating synergies with the Invesque assets they currently operate. The Greenfield transition showcases our relationship driven approach to Invesque team and our objective to streamline our portfolio relationships with the right operator for each asset and each submarket.

As part of the transition, 10 of the communities operated by Greenfield will be transferred to Commonwealth, and will be owned, operated and managed by Invesque affiliates. The first asset under the transition was moved to Commonwealth on August 2, and we anticipate the entire portfolio will be transition by year-end, pending regulatory approval and the satisfaction of other customary closing conditions.

We want to expand our relationship with Heritage by transitioning two Greenfield assets in Pennsylvania and New Jersey to them. The assets we’re in markets where Heritage already successfully operates buildings in partnership with Invesque.

Accordingly, we expect additional market density as a result of these transition to create pricing power and operating synergies with our existing senior housing portfolio. We are thrilled to expand our portfolio with another best-in-class operator.

We inherited the relationship with Greenfield as part of the Care Investment Trust transaction last year and have enjoyed our partnership with them. We held constructive dialogue with Greenfield over the past year to come to a mutually beneficial conclusion for everyone involved.

The value creation of the transition should flow through very quickly, as we expect to collect up to 2.5 million of additional annual NOI. The payback period on our investment should be less than two years.

The transition have anticipated to be $0.03 to $0.04 accretive to 2020 AFFO per share. Combining the accretion of the Greenfield transition and the Commonwealth transaction, we anticipate $0.09 to $0.12 of accretion to 2020 AFFO per share.

The transition also allows us to immediately expand and scale our Commonwealth portfolio to create the largest senior housing operator in Virginia and a premier operator in the mid-Atlantic. After the transitions are complete, Commonwealth will become our largest source of NOI at approximately 26% on a pro forma basis.

Heritage will become our third largest operator and represent an approximately 8% of our NOI on a pro forma basis. Symphony will represent roughly 24% of NOI by the end of 2019, down from approximately 70% at the time of our IPO, a little over three years ago.

Our pipeline of growth opportunities continues to be very significant, particularly in the private pay space. We've also seen an uptick in potential MOB transactions in both Canada and the U.S.

through our partnership with Mohawk. With our incredible growth over the last several years, we will be very selective on acquisitions over the short term.

I like to thank everyone for joining the call and we will now open the line for questions.

On the Greenfield transition, what would be the cost to invest for the acquisition I guess of the properties?

Yes, so for all of their various interest in the 13 properties, we paid up $4.5 billion payment.

Okay. And with -- so how many properties would have been transitioned over in August and then what's the timeline for the -- or how should we think about the timeline for the rest of properties to transition over I guess, by the end of the year?

Yes, so the first one happened in August and that was the only one in August. We would expect the majority of them to start transitioning call it Q4 with them all to be complete by the end of the year.

And with Heritage, would with that lease just be assume or is there any potential changes in the leases?

Yes, the thought would be we’re probably going to be shifting that more to a joint venture with Heritage.

In terms of the acquisition costs of abandoned the due diligences causes any color on what IPO wasn’t pursued or why are the write-off right now?

So, you know Brad as given the pace that we were only obviously have to look at an awful lot of things to be able to grow to almost $2 billion in three years and we have to make a strategic decision about how far and how much cost to incur before pulling upon. This is something that I think is gone on for -- I think 12 months with frankly and we -- as in every deal we have a great deal of negotiation twist and turns and we as a management team have decided that as we stand right now, we're not sure that this deal makes sense for us to one that’s on the table and as a result it could be appropriate conservative accounting treatment and wrote-off all the cost associated with it.

Doesn't mean that deal or something so much like couldn’t come back at some point in the future but right now, given what we know about the transaction, it just doesn't seem like it's going to happen.

And I guess, you talk about -- and I have executed I guess a few asset sales. Is there more being considered right now that could be redeployed in other acquisitions or how should we think about that?

Yes, absolutely. One of the key things that I mentioned in the last quarterly call and I highlighted it again today and we’re going to highlight even with greater emphasis right now.

When you reflect back on growing as fast as we have again three years, almost $2 million, just recently had some did calculation we've grown at a 53% annualized care, which is the fastest growing real estate company in the -- well obtain to any of the U.S. comps and probably number one or maybe number two well obtain to the Canadian comps.

When we grow that fast, this is now time to step back and say, okay, we've assembled a portfolio, we’ve accomplished our goal of diversification. We’ve accomplished our goal of scale.

Now you really emphasize that the energy and the focus around maximizing the value of those assets. So the Greenfield transition is one of those.

The sale of the one asset is another of those. We are very carefully going building-by-building, operator-by-operator and saying, let’s part of our long-term strategy now.

Now that you have assembled the size of the portfolio, what doesn't belong longer-term and when we think about that, we think about which operators do have the ability to grow it. We think about strategically what fits into the portfolio.

You should expect to see a few sales and in the coming quarters, it really small one-off building that just don't make sense where obviously, are continuing to be in growth modes, so you shouldn’t expect massive dispositions. It’s hard to be in growth mode while you are selling, but also need to be smart on maximizing value and right now there are certain assets in our portfolio that we think don’t make since long-term in terms of maximizing value and creating value for our shareholders.

And in terms of the leverage, where is leverage today on a pro forma basis with the latest round of preferred equity being issued to Magnetar and then how do you see that trending over the next 12 months?

So pro forma's right around 60% and you know, as we kind of mentioned. I think we'll -- we have a bias to reduce it but the markets are favorable right now, right.

So I think we're going to be opportunistic on refinancings. And I think over the long-term, I still do think that 50 to 55% of the long-term for the vehicle make sense but you know, in the interim we’re comfortable with where we’re at.

For triple net leased assets, where will be the financing costs today?

In terms of the cost of it?

In terms like what you’d be able to borrow today I guess, in the market?

Yes, so the most recent -- the most recent transaction of the Commonwealth the old, we just priced at a five-year fixed at 384. So blended today on the portfolio, it's right around 4.5, but I think that's trend that -- you'll see that trend down a bit as we go.

So I’ve given accounts data of that markets and the costs – remember it added very poor, a lot of what we do is spread investing and our ability to create opportunities like the Commonwealth opportunity, where we can get in a reasonable price than spreading that because as we said in that case, it was north to 200 basis points. We’re not afraid of leverage.

We understand that the equity markets have sort of set an expectation in a suitable capital terms of where we could be plus our lenders have set a very clear legal capital, where we can be. But we’re not in a rush to delever.

I think as Scott Higgs said, 50%, 55% is the right metric for us but where we are right now, we’re very comfortable. We think it's -- we consider our growth trajectory, taking advantage of very favorable leverage markets as part of our continued growth and strategy

Wanted to just turn back to this Greenfield transaction, so it -- what's happening to Greenfield then, because it looks like these assets were a large percentage of what they already were operating, so are you taking it back from that like what’s the rationale I guess for them to exit?

Chris, this is been -- as part of our constant monitoring the portfolio and as I said before in terms of maximizing value, we talked to all of our operators on a regular basis. We have a dedicated team of professionals, our portfolio management team that meets with and talks to our operators at least monthly, if not more.

This is something that's been in the works for at least six to nine months, where we know what some of their strategic goals are and it’s hard for me to speak on their behalf in terms of their strategic goals are but I think in a general proposition as a company they're looking to reduce their exposure in certain areas. We as a company, we’re looking to grow.

Commonwealth was an opportunity that was in our sights and it really just lined up quite perfectly to be honest. Sometimes it's better to be lucky than good and we’re really proud of the fact that things lined up in terms of Commonwealth is a great opportunity for us, is a great opportunity for us to vertically integrate and get into operations.

We had a Greenfield portfolio that the Commonwealth team was very familiar with and so right in their backyard and when you put some of the parts together it was a massive, massive value creation opportunity. As we mentioned in the script you could see on an AFFO basis, there’s a real opportunity both in terms of the acquisition of Commonwealth and then secondly, the integration or transition of the Greenfield assets to create north of $0.10 per share on an AFFO basis and that sort everything lined up and just worked.

So like how this Commonwealth transaction not been in the equation, was there still a plan to transition to the operator?

Not necessarily. We -- again, if both have begun on now for I am saying six months but now I think it’s about probably close to the nine months.

And it’s a iterative process. You meet with operators.

You look at performance. You see what their goals are, you assess.

Is it possible you might have sold some of those assets? Yes, possible, so possible you might have replaced operators in some of those buildings?

Yes, it’s possible, but it wasn't Chris, where a year ago, we needed to find a replacement operator for 13 assets and we went out to find Commonwealth, that is not how it worked. It was truly, Commonwealth was a great opportunity.

We're acquiring -- so as you know, historically, a lot of our business and a lot of our models acquire real estate, right. So if you look at everything we've done, there could very well have been an opportunity to acquire the Commonwealth real estate only.

Whenever you sort lined up in terms of wait a second, it’s a phenomenal operating business. We would like to have operational expertise in-house.

We’re looking to expand the offerings and the streams of income to our business and we have great portfolio of spectacular buildings that happen to be in Commonwealth’s backyard and all sort of just lined up and that is why we went down this path.

What’s occupancy like in that Greenfield portfolio?

Well, low -- call low 80s, 83% -- 82%, 83%, so we see some upside in several of those and especially with Commonwealth coming in the portfolio.

And then just on that point, you increase your exposure to I guess more operating type of business, can you just remind us what that is as a percentage of NOI on a pro forma basis and where you think that could get to?

So pro forma with the Greenfield transition was about 26% of NOI and what it could grow to you know, I'd say that's probably a relatively good run rate on a on the scaling basis.

But this include…

I think it’s important Chris to emphasize, we are a real estate company. We continue to be a real estate company.

You should not expect over the course of next couple of years, we will become predominantly an operating company that is not in our strategic plans. So I think as Higgs said, when that 25% plus or minus a few is probably where you should expect this to be, would we be comfortable increasing?

Yes. Would you -- should you expect us to become an -- predominantly an operating company?

No.

Right. So you some existing JVs, where you can participate in the upside, if I’m not mistaken on the ground?

Correct, right.

So if you include - so that 26% includes all of that?

It doesn't, so that was just direct wholly-owned 100% Greenfield and Commonwealth.

Right, so if you kind of include?

So including the JVs it's closer to 35% to 40% probably over the long run including some of the other transitions here but 35% to 40%.

Okay, great. And are there any other operators that you looking to - that could transition into the Commonwealth platform whether it will make sense or because there is either just some type issue that led itself to that?

Not issues, what I will say is when we acquired it one of the first questions we ask the team was what was their ability to scale. And we feel confident this management team could scale to about 50 buildings.

Currently post the Greenfield transaction there will be around 33. So there is the ability to scale up this platform.

With that said, we don’t have anything in our existing portfolio that we plan to additionally transition to them.

Okay got it. And then the reason that those handful were over to heritage, was it just the markets that we’re in?

Yes, we have to manage relationships and one of the things we wouldn't want to do is necessarily create situation where we're bringing in a new operator to a market. So the ability to combine that with Heritage who is already there just strategically made much more sense for us.

Cool. And then the FFO accretion that you talked to 2020, is the assumption that you run at 60% leverage over that time period?

Yes.

I apologize if this was asked earlier and if it has just let me know and I’ll check the transcript. But the new CMS schedules came out for the - under PDPM and what the payment schedules would look like.

Was there anything in there and talking to your operators that was surprising and do you have any better sense of what your risk is on the transition to this new system?

Tal this is Bryan, I'll take this one. What I’ll say is that especially as we compare our portfolio to the broader skilled nursing industry, we feel pretty well-positioned to benefit under PDPM.

I say that because our facilities tend to be more Medicare focused with clinically compact patients that aren't exclusively rehab, and that’s fundamentally with the PDPM model is created to incentivize Medicare perspective. I'd say the increase to the Medicare rate was also generally favorably received but the big surprise for us is separate from the Medicare issues and that was the Medicaid Illinois rate increase of $240 million.

It’s something the provider space is being lobbying for, for quite some time but Illinois has been reluctant to sort of meet the needs of the providers there. So we were very positively surprised that was announced last month.

So just one follow-up, you kind of alluded to it in your opening remarks with respect to Magnetar and - a new series of press. Number one, how should we think about the potential timing of that description taking place?

And number two, notice that there are also extending or they have extended a loan to you guys subsequent to quarter end just maybe can you just talk to the rationale for that?

Sure, so on your first question with respect to the closing, we expect it to close within the next 30 days from today. And then on the prep, and then with respect to debt it's just a short-term capital I wouldn’t expect that to be a long-term loan outstanding with them.

Just one question on the accretion provided is that based on in place occupancy or now are you assuming some further improvements?

It's including a modest improvement, but it's basically in place NOI. One thing important to comment on - that it does include full board CapEx on those portfolios - on the Commonwealth portfolio that were out.

So that reduction is included in that AFFO number.

Well thank you everybody for joining us. Appreciate the continued interest and we’ll talk to you next quarter.

Take care.