Invesque Inc.

Thank you. Good morning and thank you for joining the call.

With me today are Scott White, our Chairman and Chief Executive Officer; and Adlai Chester, our Chief Investment Officer. Scott will going to start with the summary of Invesque transaction activity so far this year, as well as a quick update on operational improvements we are seeing in the portfolio.

I will then discuss our financial results for the quarter and Adlai will close things with some color on portfolio trends and further details on the company's disposition activity. We will then open the line for questions.

The first quarter 2022 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 May 19th. 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.

Hello all and good morning. Thank you for joining Invesque first quarter 2022 earnings call.

Following an extremely busy third and fourth quarters last year, our team has not slow down in 2022. We opened the year with a flurry of transactions that further our strategic focus, streamline our portfolio and our balance sheet.

Between March 1st and April 1st, we closed on four separate deals to sell eight assets for a gross sales price at nearly $80 million. The MARQ transaction with the sale of our Bridgemoor portfolio, which included four transitional care facilities in Texas that sold for approximately $52 million.

Adlai will touch on the specifics of that transaction later on the call, but the sale of this portfolio was a big win for Invesque. In addition to the sale of Bridgemoor, we sold a handful of non-strategic underperforming Seniors Housing assets.

As mentioned on our last call, on March 1st, we sold the assisted living and memory care community in Harrisburg, Pennsylvania to a regional operator in the Northeast who is looking to grow their assisted living platform. This community was previously managed by our wholly-owned operator, Commonwealth Senior Living.

After much consideration, we concluded with Commonwealth that the community would be better suited for a group that is more local to the Harrisburg market. Then, 30 days later, we sold to seniors housing assets in New York with the same northeast based operator.

Gross sales price of those two communities of $19.2 million generated proceeds, which were used to pay down the companies corporate credit facility and de-levered the balance sheet. Lastly, we sold the vacant community in Port Royal, South Carolina for $3.5 million.

This community was previously operated as a standalone memory care community managed by Phoenix Senior Living, and was determined to be non-strategic and ceased operations in 2021. The buyer of this community plans to repurpose the community as a drug and alcohol rehab facility.

In total, we consummated almost $300 million of assets over the last 10 months, which marked significant progress improving the portfolio. As Scott Higgs will described further, we have used proceeds from these transactions to reduce leverage and shore up the balance sheet.

We're not done yet. We continue to actively manage our remaining portfolio.

identify opportunities to sell properties for attractive values, and network with potential buyers. You will likely see us continue to explore property sales for the remainder of 2022.

However, it is important to note that we're not in a rush to sell properties at discounted pricing. Our strategy is to sell non-core assets when we believe there's an opportunity to maximize value for our shareholders and strengthen our balance sheet.

Separately, I'm happy to report that the current impact of COVID-19 continues to decrease across our portfolio as positive cases remain relatively low among residents and staff. I remain optimistic that the pandemic is mostly in the rearview mirror.

And now our operators can refocus their efforts on growing census and improving overall financial performance. On that note, our Commonwealth portfolio continues to be a bright spot in our overall portfolio.

The communities operated by Commonwealth have begun to show some really positive trend thus far in 2022. Despite lower movements in January and February as the Omicron variant of COVID-19 impacted a large number of Commonwealth communities, census rebounded in March to end the quarter with solid growth.

We are pleased to see that growth continues into April. The occupancy of the 20 asset portfolio acquired in 2019 ended April, a 120 basis points higher than they started the year.

In addition to census growth Commonwealth increased resident rental rates by 6.5% on March 1 to offset increased labor and operating costs. That rate increase excludes additional rate growth from care charges.

It's not easy to raise rates, but we felt it necessary to maintain the quality of care we expect in our buildings. This rate increase along with improving census resulted in the 28 asset portfolio that Commonwealth manages on behalf of Invesque achieving the highest monthly NOI to date since we acquired the Commonwealth platform in mid 2019.

This success comes in spite of ongoing challenges that commonwealth and our operating partners are facing. Staffing continues to be the number one challenge facing our operating partners and the team at CSL has done a tremendous job reducing their reliance on agency staff across the portfolio over the last 90 days.

Labor will continue to be a stress on our operations. But the positive movement on census and rental rates prove that demand for our products is there and I believe will increase in the coming years.

As you've all heard me say time and time again, I'm a firm believer that culture is a key component of Invesque. We invest significantly in our team and in our culture, and therefore proud to highlight that Invesque was once again included as one of the best places to work in Indiana.

The Commonwealth team takes a similar approach in culture. Founder Richard Brewer, CEO, Earl Parker and the entire Commonwealth team recently celebrated their 20-year anniversary.

Wow, 20 years of serving seniors and this is a challenging business with a lot of ups and downs and the team of Commonwealth has position themselves as one of the best regional operators in the country. In addition to their 20-year celebration, I'm extremely pleased to highlight that a majority of the 33 communities managed by Commonwealth have earned the highest possible rating from U.S.

News and World Report's inaugural Best Senior Living ratings. These ratings are just announced earlier this month.

The new consumer guide is aimed at providing seniors with transparent data to help them and their families identify high quality providers that meet their senior living needs and preferences. I could not be prouder of the Commonwealth team and look forward to continuing to celebrate their success for many years to come.

With that, I'll turn the call back to Scott to touch on our financial metrics for the quarter.

Thank you, Scott. For the quarter ending March 31, FFO was $0.07 per share and AFFO was $0.06 per share.

We anticipate that the impact of the transactions discussed by Scott previously will have a positive impact on our AFFO per share of approximately $0.11 to $0.12 on an annual basis relative to first quarter performance. Consistent with a strategy to streamline our portfolio, our finance team has been busy streamlining our capital structure.

As noted on our year-end call in January, we completed the partial redemption of the 2022 convertible debentures by repaying $20 million of the outstanding principal. The remaining outstanding debentures were amended to change the interest rate to 7%, effective January 31, 2022, and extend the maturity date to January 31, 2025.

Also, in January, we redeemed $10 million of the preferred equity that encumbers our Commonwealth portfolio. This redemption reduces our carrying costs and fixed charges by $650,000 per year.

These moves are aligned with our strategy to strengthen and de risk our balance sheet. Further, the company utilize available committed capacity in the KeyBanc credit facility to refinance assets that were previously encumbered by property level mortgages.

During the first quarter, we refinanced three assets operated by Commonwealth Senior Living utilizing the KeyBanc credit facility. Subsequent to quarter end, we also refinanced the skilled nursing facility operated by the Providence Group.

These moves not only streamline our capital stack, but also provide nearly $1.2 million in annual debt service savings compared to the structures that were previously in place. Moving forward, we will continue to look for ways to create similar efficiencies within our debt capital stack.

As previously disclosed, the company announced 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. Through the end of April, we have redeemed 258,100 common shares at an average price of $1.57 per share, and approximately $50,000 of convertible debentures under the NCIB.

This will continue to be part of our go forward strategy as we believe that this nominal use of capital has great inherent value to the company and its stakeholders, as we're able to capitalize on the undervaluation of our outstanding security. As we progress through the remainder of 2022, our finance team will continue to look for ways to streamline our capital structure and create additional efficiencies when and as opportunities arise..

I will now turn it over to Adlai Chester, our Chief Investment Officer.

Thank you, Scott. The operating results of our triple-net portfolio continues to struggle as operators attempt to rebuild census and manage costs coming out of the pandemic.

As Scott noted earlier, we are seeing some very positive trends in our Commonwealth portfolio, and those trends are also being seen in some of our other SHOP operators. 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 stabilized portfolio EBITDARM coverage remained below 1.0 times for the period ended December 31 2021. As of December 31, our trailing 12 month occupancy for the stabilized triple-net assets and stabilized SHOP portfolio was 74% and 76%, respectively.

While our medical office portfolio stabilized occupancy remained flat at 81%. As noted last quarter, we think it is important to highlight that our SHOP operators have been successful in increasing resident rental rates over the last 18 months, with most of them rolling out larger than normal increases in Q1, 2022.

For the 12 month period ended December 31, 2021, the average monthly rate paid by residents in our s stabilized SHOP portfolio was up 4.4% versus the period ended December 31, 2020. While our operators voted minimal pushback from residents and families, I do want to highlight those operating costs primarily related to staffing, food and insurance have also increased substantially over the last two years, offsetting all or most of the incremental revenue.

We expect margins to continue to be compressed for the foreseeable future. As Scott touched on earlier in the call, we successfully exited our relationship with Bridgemoor on April 1st.

The Bridgemoor portfolio was has been challenging for us during the course of the pandemic as their operations were frequently interrupted by COVID-19 outbreaks. Bridgemoor, like other operators was not eligible for certain tranches of Cares Act funding, because operators needed to establish years of revenue and expense data to qualify, and Bridgemoor was a relatively new operation, with most of the facilities being in operation for less than 24 months prior to the pandemic.

In spite of these factors, we sold the portfolio for a price per bed of approximately 152,000. Due to a lack of certificate of need in Texas price per bed tends to be lower.

Since the start of the pandemic in 2020, skilled nursing facilities in the largest Texas markets trade at roughly 70,000 per bed on average, with a low of 44,000 per bed. The price that we achieve with the Bridgemoor portfolio was comparable to the inside properties that we sold for 160,000 per bed in the fourth quarter of 2021.

I believe this highlight that our portfolio can achieve very attractive pricing in part because we own some of the newest real estate in the industry. I want to once again reiterate that we are focused on creating the strong portfolio of private pay senior housing assets.

With the dispositions announced over the last three quarters, our portfolio continues to pivot towards private pay, with almost 60% of our pro forma NOI coming from senior housing versus over 75% of our NOI coming from skilled nursing five years ago. I expected the seniors housing number will continue to increase in the coming as we deliver on our outline strategy.

During the last quarter, I described that thus far in 2022, there's been a greater emphasis on investors restructuring relationships with triple-net tenants, and seniors housing and skilled nursing. This is the reality of how the industry is grappling with the headwinds, and I see that trend continuing.

We believe the direct impacts of COVID-19 on our portfolio are waning. But there are lingering effects that will continue for months and years.

The most important one, staffing, will continue to place unprecedented pressure on wages and salaries. Other input costs ranging from food to energy to building supplies are all experiencing inflationary pressures unlike those we've seen in decades.

These factors combined to create a difficult environment to control costs, and building back revenue has also been a challenge. While we've been very encouraged by the census growth and rate increases observed in our Commonwealth and other SHOP portfolios, we know that challenges remain across the industry.

Much of the industry saw census growth slow or reverse during the first quarter. As operators continue to rev up the sales engine, the normal course move outs that happen across our industry have not slowed.

This has created a challenging environment for many owners and operators to navigate. However, as we have executed on our strategy, we are very well-positioned to weather these challenges with a streamlined and much stronger portfolio.

We expect the positive momentum to continue as the year progresses. With that, I'd like to thank everyone for joining the call.

And operator, please open the line for questions.

Good morning everyone.

Good morning, Frank.

Congrats on another busy quarter. And I can tell like you guys have been working very hard on the capital recycling front.

But just my first question, just wondering, with the rising interest rates in mind, have you seen any changes in the market in terms of the Invesque's demand? And the second part is, do you think the rate hikes will have any impact on your portfolio transformation plan?

Frank, that's a great question. So, to the first question, no, we have not seen any meaningful change in terms of asset values, which is what I think you're asking about or demand for the assets in the market.

Its a direct result of interest rate hike. I think it is something we're monitoring, and it is possible that it could have implications across the real estate asset class, which would also mean in our industry.

I think our industry is somewhat unique and that there are unique buyers for certain assets where we've sold off our assets today, they've been very specific to unique buyers. For example, we talked about the assets we sold off this last quarter and they were specifically focused on someone who wants to grow in the Northeast region.

So, while I do think interest rates are something we're going to have to monitor. We have not seen it have implications on asset values to date.

And I'm not convinced it's going to have an immediate impact on our strategy over the coming quarters.

Thanks. Appreciate the caller.

Yes, that's pretty fair. Like I mean, you guys are very different territory versus other like, players.

So following on that, with respect to the redeployment of the proceeds from dispositions, would you still focused on that reduction in the long term? And do you see any attractive opportunities on the acquisition front at this point?

So we do Frank, we see opportunities to deploy capital. Our strategy, which we've been very clear about is to simplify our portfolio, simplify our story and simplify our balance sheet.

It's all about simplicity right now. And step one is simplifying the story in the portfolio.

And you saw that through the asset sales and as I've indicated, we'll continue to look for as a when appropriate asset sales, redeploying that capital will predominantly be focused right now on delivering as well as just cleaning up various pieces of capital on our balance sheet. If you look at our the balance sheet, we have two different tranches of converts.

We have a couple of different tranches of press. So you should expect to see us primarily focused on that.

There will be opportunities, though I have to be very realistic, there'll be small to grow with our preferred operating partners. We're constantly out there looking for opportunities to grow with the operating partners in our portfolio, not only with additional acquisitions, but even with additions or major CapEx projects around existing assets so that we can enhance NOI with our preferred operating partners.

Yes. I totally agree.

That's fair. And thanks for the color.

I guess like in terms of -- sorry, just going back to the rising interest rates, it's a very popular topic this days. I got you guys.

You guys don't have like much exposure to that, right? I'm looking at your best schedule, like you have, like small principle material this year, and for next year, you have like, I mean, 69.2% maturing.

But I see those, majority of those, I think 60% that are fixed rate debt and the interest rate is ranging from like just 6% [ph]. So I guess like -- I just want to confirm like the rising interest rate doesn't have much impact on your higher interest expenses, right?

Yes. This is Scott Higgs.

I think that's a very fair assessment. And certainly in the very near term over the next 12 to 24 months, approximately 80% of the debt fixed rate today, and we don't have a lot of rolling debt over that period as well.

So, I think that's a fair assessment. No material impact.

But certainly something we're going to continue to monitor and look for efficiencies and try to continue that trend.

Okay. Thanks, Scott.

Appreciate the confirmation. One last question from me.

So, with respect to your comment that the disposition of community thus far 2022 will have like a positive impact on AFFO per share relatively to Q1 results. Could you elaborate more on like how the dispositions drive the AFFO growth?

I just want to make sure like, I got the right point.

Yes. So one of the things that we've been focused on is disposing of assets that are non-core to our portfolio and where we're going.

Nothing could be more non-core than assets that are generating negative NOI. We had a handful of buildings, they were actually costing us money to keep open or to maintain, or that we shut down and had small costs associated with keeping the building secure so on and so forth.

So by eliminating those assets, if we do nothing else, which by the way, we are going to do other things. But if we do nothing else, there's a $0.11 to $0.12 of AFFO on an annualized basis, that was bleeding out of the system based on facilities that we've eliminated.

So when you take that and just extrapolate it, I'm just going to round here for ease of math to take the $0.12 over the next three quarters plus or minus, and you have about $0.04 of AFFO that sort of work their way back into the system, because they're not bleeding out. That assumes no growth in occupancy, assumes no growth in array, assumes no other changes in our portfolio.

So you should expect to see a reasonable increase in AFFO per share if we do nothing else.

That's great. And I guess like, with those proceeds, you can actually pay down debt then you're saving on the interest expenses, that's right.

Okay.

That's correct. That's exactly the strategy.

We got it.

Yes, exactly. So I guess the saving on expenses is not included in this guidance, like the $0.11 to $0.12?

Yes. So I would say that, no.

So that is not built into that $0.11 to $0.12. I think it's to be determined where we're going to allocate that capital.

Because remember, you refer to as interest expense, in some cases, we may pay down pref. We may do other things in our capital stack, but your observation broadly is correct.

Okay, perfect. And sorry, just one last question from me.

Should I -- should we expect like similar growth on FFO? I guess like, is that fair to say like FFO will go like, more sort of like $0.10 for the rest of the year?

Yes. So I'm not giving specific guidance on a quarterly basis.

But again, if you take these where we were this quarter, right, $0.06, and you take the $0.12 and I don't want to pin it just the $0.12, because we said $0.11 to $0.12, but you take $0.12 just to make the math easy for me. You take the $0.12 cents, divide it by three quarters, that's $0.04.

You take the $0.06 from this quarter, you get $0.04. That gets you to $0.10.

Again, I am not putting out any guidance on the $0.10, but I think your math is reasonable.

Okay. Sounds great.

That's great color. Thank you very much.

I totally understand. I'll turn it back now.

Thank you.

Thanks so much for the questions. Take care.