Good morning, ladies and gentlemen. Welcome to the Invesque's second quarter 2022 conference call. I would now like to turn the call over to Scott Higgs, Chief Financial Officer. Mr. Higgs, you may begin. One more note, today's call is being recorded. Mr. Higgs, please go ahead.
Thank you, April. Good morning, and thank you for joining the call. On the phone with me today are Scott White, our Chairman and Chief Executive Officer, and Adlai Chester, our Chief Investment Officer. Scott will get us started with a summary of some recent dispositions and touch on the positive occupancy and overall financial trends we are seeing with our Commonwealth and other SHOP portfolios. I will then discuss our financial results for the quarter, and Adlai will wrap things up with some specifics on operating trends and additional details on the company's disposition activity over the last 12 months. We will then open the line for Q&A. The second 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 August 17.
Please be reminded 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. With that, I will turn the call over to our CEO, Scott White.
Good morning. Thank you for joining Invesque's second quarter 2022 earnings call. As we are now more than halfway through 2022, I'm excited to provide you with an update on the execution of our strategy to simplify our portfolio, simplify our story, and simplify our balance sheet. As part of this strategy, we continue to reposition the company to primarily focus on private pay senior housing assets. We'll also take a minute to highlight the positive occupancy and financial momentum that we continue to see from our captive management company, Commonwealth Senior Living. The Commonwealth portfolio continues to be one of the key areas of focus for our company, and I am pleased with the performance to date in 2022. The highlight of our year-to-date results has been our disposition strategy.
So far in 2022, we have sold 21 properties valued at over $190 million. These sale transactions have helped us make great strides toward becoming a predominantly private pay seniors housing focused company, first by reducing our skilled nursing exposure and second by reducing our medical office building investments. The first step was reducing our investments in skilled nursing. On our last earnings call, we announced the sale of our Bridgemoor Transitional Care portfolio effective April first. As a reminder, that sale included four assets in Texas and was sold for $52 million. This, coupled with the sale of our Ensign portfolio last fall, represents a large step in the reduction of our skilled nursing exposure. The second step was reducing our investments in medical office buildings.
Two weeks ago, we announced the sale of the majority of our medical office portfolio at very attractive pricing, which was a huge win for the company and a large step toward the simplification effort I keep highlighting. This included the sale of a single medical office property in Orlando, Florida, where the anchor tenant acquired the property from Invesque. The second sale was a larger transaction that included the sale of substantially all of our properties in Canada for CAD 94.3 million. As a result of these transactions, we now have only four medical office buildings remaining with approximately 190,000 sq ft. We're currently evaluating disposition options for these assets, and it is likely that we'll fully exit the medical office sector within the next year.
In the second quarter, we closed on the sale of our interests in two 55+ communities that were previously managed by Calamar. This transaction closed on June fifteenth, and we received net cash proceeds of $10 million at closing and utilized those proceeds to continue delevering and simplifying the balance sheet. In most cases, we have used sale proceeds from these transactions to pay down debt or otherwise reduce company leverage. I think you should expect to see this trend continue in the coming quarters as we remain diligently focused on creating a private pay-focused seniors housing portfolio with a handful of our preferred operating partners. The team at Commonwealth continues to see strong progress, with occupancy reaching pre-pandemic occupancy levels in July for the first time in over 2 years.
The portfolio of 28 assets that Commonwealth manages on behalf of Invesque saw a 500 basis point increase in occupancy from January first to June thirtieth, and that momentum continued through July. The occupancy gains, coupled with resident rate increases that went into effect on March first, result in strong performance from the Commonwealth portfolio in the second quarter. While I remain optimistic that we will see continued positive progress from the Commonwealth portfolio for the remainder of 2022 and into 2023, it is worth noting that staffing remains a significant challenge for Commonwealth and the rest of our operating partners. Many operators are being forced to get creative on ways to attract and retain staff, as well as control expenses that continue to creep up.
I'm optimistic about the future of the industry and believe that the demographic tailwinds we have all been discussing for the last five to 10 years are really starting to come to fruition. With that, I'll turn the call back to Scott to touch on our financial metrics for the quarter.
Thank you, Scott. For the three months ending June 30, FFO was $0.11 per share and AFFO was $0.12 per share. As Scott mentioned, we have been strategically disposing of assets in recent quarters to be more focused on the opportunity that we believe currently exists in private pay seniors housing. With each disposition, our finance team has been strategically allocating sale proceeds to delever and streamline our capital stack. Year to date, we have repaid over $104 million in consolidated indebtedness. This includes paying down a portion of our KeyBank revolver, as well as fully repaying the credit facility secured by our medical office building portfolio. In addition, we have made the strategic decision to, as capital becomes available, retire portions of the preferred equity instrument that currently encumbers the Commonwealth portfolio.
Earlier this year, we retired $10 million of this preferred equity. This retirement is accretive to Invesque as the preferred equity currently features a 6.5% interest rate, and this rate escalates as we move into future periods. In addition to utilizing dollars to repurchase shares and debentures under the NCIB, we feel that retiring this preferred equity instrument is a prudent use of the company's excess capital. Our team continues to monitor the changing interest rate environment. I'm pleased to report that we have only 3% of our consolidated debt maturing over the next 12 months, and that 78% of our consolidated debt features a fixed interest rate. This positions us well as we continue to keep an eye on the changing macroeconomic environment.
As previously announced and highlighted on our last call, the company announced that the Toronto Stock Exchange approved its notices 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 July, we have redeemed approximately 414,000 common shares at an average price of $1.41 and approximately $70,000 of convertible debentures under the NCIB. This will continue to be part of our go-forward strategy as we continue to believe that this nominal use of capital has great inherent value to the company and its stakeholders. I will now turn it over to Adlai.
Thank you, Scott. As has been the case for the last few quarters, the operating results of our triple net portfolio continue to struggle as operators attempt to rebuild census and manage costs during what is one of the most challenging staffing environments our industry has ever seen. As Scott highlighted earlier, we are, however, seeing very positive occupancy trends in our Commonwealth portfolio and are seeing positive census growth in the majority of our SHOP assets to date this year. As always, a friendly reminder that 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, remains slightly below 1.0x for the period ended March 31, 2022.
As of March 31, the trailing 12-month occupancy for the stabilized triple-net assets and stabilized SHOP portfolio remained flat at 74% and 76% respectively. Given the recent sale of the majority of our medical office portfolio, we will not be providing occupancy data on the 4 remaining assets as they make up such a small portion of our portfolio going forward. For the last couple of quarters, we have highlighted the rental rate increases of our SHOP portfolio as we think this is an important number to highlight as it shows the success our operators are having in driving revenue to help offset the increased costs of the current operating environment. Outside of wage pressure and agency staffing costs, our operators have seen increases in food and supply costs, maintenance costs, and insurance costs.
For the 12-month period ended March 31, 2022, the average monthly rate paid by residents in our stabilized SHOP portfolio was up 4.3% versus the period ended March 31, 2021. Many of our operators implement resident rate increases on an annual basis, and we expect that our operators, and most in the industry, will roll out significant rate increases again in the first quarter of 2023. Next, I'd like to provide some additional commentary about the sale transactions that we consummated in second quarter and subsequent to quarter end. The sale of our stakes in the Calamar properties may seem like a departure from our goal of becoming a predominantly private pay senior housing owner, but it is actually quite consistent. The Calamar properties were entirely private pay, but are operated as age-restricted apartment complexes.
This means that the communities do not provide care services, and residents are not able to age in place like in our other senior housing communities. This also means that demand for these communities is not need driven like our other senior housing communities. We believe that the operating results for these types of communities could be more volatile because they are dependent on the housing market and much less dependent on the demographic shift of aging seniors who need care services. Additionally, the sale price that we achieved on these properties exceeded our expectations, which signaled to us that it was the right time to exit the investment. The sale of the majority of our medical office properties advances our shift to private pay senior housing significantly.
When we initially acquired the medical office portfolio, our strategy was to grow that portfolio with bolt-on acquisitions in Canada and the U.S. Ultimately, that proved more challenging than anticipated, and we saw very few attractive opportunities to expand the portfolio, especially in Canada. When we transitioned the management of our portfolio to JLL, our goal was to stabilize the portfolio and get it ready to market. We are proud of our joint efforts with the JLL team to stabilize the portfolio's results and attract a buyer for the portfolio at excellent pricing. There are few logical buyers of the medical office portfolio that spans both countries, so taking different approaches for the two countries was the logical conclusion. The sale of our University Boulevard property to its anchor tenant was a highly efficient transaction that allowed us to jump-start the disposition process.
The sale of the Canadian properties was the product of a competitive process orchestrated by BMO that resulted in a very strong pricing. As a result of the two transactions, we have one remaining medical office building in Canada and three in the United States. We are in active discussions with multiple prospective buyers on the remaining assets and believe that an exit of the remaining medical office properties in the next 12 months is highly likely. Again, these transactions are all part of our strategy to create a strong portfolio of private pay senior housing assets. As a result of the disposition transactions, over 60% of our pro forma NOI will be generated by our private pay senior housing assets, compared to over 75% of our NOI coming from skilled nursing five years ago.
This proportion will continue to increase as we look to complete the disposition of our medical office assets and identify skilled nursing facilities that would achieve attractive valuations. Finally, I'd like to touch on the continued recovery of the senior housing industry. We closely monitor the disclosures by other public companies invested in senior housing, along with the updates provided by industry data provider NIC. We are encouraged by the continued increase in census and rent growth across the industry, but we are especially encouraged by our portfolio's performance relative to the average. As Scott mentioned, the 28 properties managed by Commonwealth Senior Living saw occupancy growth of 500 basis points during the first six months of 2022. If we look at our aggregate SHOP portfolio, it saw occupancy growth of 520 basis points during the same period.
By comparison, the industry as a whole saw roughly 200 basis points of occupancy growth during the same period. The occupancy gain generated by Commonwealth is just one of many metrics that tell us that Commonwealth is truly an industry-leading operator, and we are thrilled to be partners with their executive team. With that, we can go ahead and open the line for questions.
Thank you. If you would like to ask a question, simply press the star key followed by the digit one on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it's star one on your telephone keypad. We'll pause for a moment. Again, star one to ask a question or make a comment. We'll first hear from Frank Lu of BMO Capital Markets.
Good morning, everyone.
Good morning, Frank.
Good morning. Congratulations on another busy quarter on the portfolio transformation front.
Thank you.
Just want to follow up on the disposition of MOB. I'm just curious which three MOB hasn't been sold in Canada? Is there a reason why it wasn't sold along with the disposition of other MOBs you sold earlier in July in Canada?
Just to clarify what has or has not been sold, there are four properties that have not been sold. Three of them are in the U.S., only one remains in Canada. There's one in Canada, three in the U.S. As Adlai touched on, to a certain degree, there weren't logical buyers for both U.S. and Canadian assets. We bifurcated the process, ran them separately, and tried to maximize value specific to the assets. For example, we had properties across Canada, then we had two in Florida and two in New York. One in Florida sold to the tenant. The tenant was a logical buyer for that property. They'd been in it for a long time, and they were willing to pay what we believe was probably more than anyone else. That one took care of that one.
Almost all the Canadian assets went to one single buyer, and then the three remaining U.S. assets we are currently assessing options for. We're not in a hurry to sell those assets for prices that we don't think are fair. We're looking to maximize value and, it is my expectation that in the next year, we will likely be entirely out of the medical office building business.
Okay. Appreciate the color. That's great. Just want to switching gears to IFRS cap rate. You know, it's pretty encouraging to see the quarter compression. Just wondering, was the compression mostly driven by the dispositions incurred during the quarter, or is there some other adjustments you're doing on the valuation side?
Frank.
Yeah. Hey, Frank. Yeah, for sure. The answer is yes. It's primarily due to the disposed of portfolios is driving the change.
The follow-up on that is the fair value loss of $18.6 million was just driven by the write-down of skilled nursing assets, right? To reflect the current market conditions.
That's correct.
Okay, great. Just last question from me. With respect to the SHOP portfolio, and I mean, it's definitely encouraging to see the improvements on the operational front. Should we expect more occupancy gains and revenue per resident growth further down in the second half of 2022?
We absolutely do. I wanna be careful not to overplay, but the trend we're seeing across the industry, so let's start at a macro level, is increasing occupancy and increasing average daily rents. As Adlai talked about, we've seen specifically in our Commonwealth portfolio that over the last six months, Commonwealth has exceeded the occupancy gains more broadly in the industry, as well as the average daily revenue, that we've seen more broadly in the industry. When you fast-forward or you look ahead, I do believe we're gonna continue to see increasing occupancy, and I do believe we're gonna continue to see increasing average daily rent. Now, I wanna caution that we're also grappling with increasing expenses. There's no doubt that, you know, the rent increases are directly correlated to and in part driven by the increases in expenses.
You know, we're very thoughtful and careful about increasing rents. These are people's homes and we need to respect
The cost of living in our facilities. We also need to make sure that we're delivering high quality care. Across both Commonwealth and our other partners, we're seeing increases in labor costs, increases in food costs, increases in general inflationary costs. Right now we are hoping that the revenues will continue to exceed the expenses, and we'll be able to expand margin. I do believe that occupancy will continue to trend in a positive direction.
Okay, great. Sorry, I just want to follow up one last question. The revenue per resident for SHOP, I see it's changing quite a bit from Q1 to Q2. Is that like more resident or is that like due to like new residents paying higher rent? Or is it more service offering, you know, as we're exiting the pandemic? I mean, like tenants using more services, on site.
All of our tenants, all of our operators, including Commonwealth, have been raising rents. It's. As I mentioned, as a result of increased expenses that we're seeing, we've been raising rents. I think Adlai mentioned that we implemented a March first across the board rent increase in our Commonwealth portfolio, and other operators are doing the same thing.
Okay. Got it. Yeah. Thank you very much for your color. Congrats on another busy quarter, and I'll turn back.
Thank you, Frank.
As a reminder, star one to ask a question or make a comment. Next, we'll hear from Tal Woolley of National Bank Financial.
Hi. Good morning, everyone.
Good morning, Tal.
On the triple net side, I'm just wondering, like, what sort of needs to happen at the operator level you know, when you're talking to your tenants, to get the, you know, sort of to improve the rent coverage on site? Is it merely a question of eliminating COVID costs or bringing down staffing costs of the operator? Can you just give me a little color around, what they're trying to change?
I think it's a number of things. What you're looking at primarily is the skilled nursing portfolio. The skilled nursing has been much slower on occupancy recovery. Skilled nursing is related to your triple net question and has continued to grapple with the same increased expenses that I just talked about. It's a little bit harder on the skilled nursing side to implement rent increases. As you may recall, a lot of the skilled nursing side of the business, which is where most of our triple net is government reimbursed by Medicare and Medicaid, which doesn't give the operator as much control to raise rents.
What is CMS, I believe, right, is the agency in charge of controlling that, you know, how those reimbursement rates are? Do you have a sense of what the outlook is, you know, for any sort of improvement there?
Yeah. Hey, Tal, this is Bryan Hickman. I'll take your question there. When we look at our skilled nursing portfolio, there's really sort of two governing bodies. CMS is responsible for setting Medicare payment policy, and that turned out to be a positive surprise in the recent final rule that was released just last week. Payment rates effective October first of this year will go up by 2.7%. And why I say that's a surprise positive, there were many in the industry who were expecting payment rates to decrease year-over-year.
What I think you see there is Medicare recognizing that there is inflationary pressure associated with patient care, that even though all other things being equal, Medicare would prefer to hold rates or reduce them, they do need to pay the providers to make sure they're able to care for their residents. The other sort of governing body is each individual state which sets the Medicaid payment policy. You know, roughly half if not more of our patients in our skilled nursing portfolio are Medicaid patients. Those payment policies are very important for us to monitor. When we look at the states in which our skilled nursing assets are concentrated, we actually saw some outsized increases to Medicaid rates.
For example, Illinois recently passed a $700 million overhaul of the Medicaid program, which will result in sort of meaningful increases to Medicaid patient care. You know, we estimate somewhere in the 10%-11% range. All of that again is to say that the states would probably rather have flat or, you know, no increases, but they recognize that they need to pay the operators to ensure quality patient care. Many of those rate increases are effective either July 1 or September 1. We haven't seen those roll through our results yet.
Fingers crossed, hopefully that, you know, like we should expect to see some improvement in the coverage ratios maybe by the end of the year. Is that a reasonable assumption?
I would expect those things to have a positive impact on coverage. Yes.
Yes. Okay. And then just a bigger picture, as you're sort of reformatting the portfolio here, is there a target amount of dispositions you're looking to achieve or a target, you know, leverage target or a target asset mix? How long do you think it will take you to get there?
Let me start with the last part of the question and work backwards. In terms of target asset mix, we are pushing to become a predominantly seniors housing portfolio. I emphasize the word predominantly because I want to be careful about not suggesting we're gonna be exclusive. Why do I do that? Because, as I've said a few times, we're not gonna sell assets just for selling's sake. We're being very
Methodical, thoughtful, maybe even slow to a certain degree to make sure that we find the right buyers to maximize value. If I had that proverbial magic wand, I'd love to be 100% seniors housing by year-end, but I don't have that magic wand, so I have to be realistic in saying that when we find the right opportunities, we're gonna continue to dispose of non-seniors housing assets. We've already eliminated a number of seniors housing assets that were just cash flow negative. We've strengthened the seniors housing portfolio. We've eliminated non-seniors housing assets, and my goal, hope, expectation is that as we get to year-end and into the new year, we'll be substantially all seniors housing. As it relates to leverage, we're continuing to chip away at it. As you can imagine, it's hard, right?
I shouldn't say started. When earlier this year, last year, you were levered at the levels you are, it takes a lot to chip away. Higgs, what have we chipped away at from a leverage standpoint over the last six to 12 months?
Over the last 12 months, it's about 400 basis points down.
Okay. You've eliminated 400 basis points over the last 12 months and you should expect to see that we're gonna keep slowly chipping away at that. As you know, we have a convert coming due next year, so that's part of our thinking as we think about delevering. What else was in your question? Did I miss anything? Oh, target pace of dispositions. Yes. Target pace. There isn't a specific target pace of I don't wanna have, you know, as you look back over the last, I guess it's year and a half, we're probably close to $400 million now. But I don't wanna suggest, well, that was the goal, $400 million, or that the forward goal is X hundred million, 'cause that's not the goal at all.
The goal is to maximize value, create incremental value for our shareholders, and reposition the portfolio as a simpler, predominantly private pay seniors housing portfolio.
Scott, I guess, like, I just have to ask the question simply because of your, you know, your prior experience with, HealthLease Properties and stuff like that, is it, you know, like are we positioning this ultimately to try and sell Invesque? Or are we looking to have, you know, this be sort of like an ongoing, you know, you wanna continue to run this for the long term in the public markets?
Yeah, look, every day we're looking to maximize value for shareholders, and any which way that can happen is what we're focused on. What exactly that looks like, I think it's hard to say. It would be, I think, inappropriate to suggest that we run the company either for sale or for some strategic option. We run the company to create shareholder value, whether that comes through some sort of strategic sale or through some sort of other method, I think it's to be determined.
Just lastly, the Magnetar preferred. If I recall correctly, there's a ratchet in the liquidity preference, and I can't remember when that starts to kick in, if it's, you know, coming soon. I just, you know, like it's an expensive piece of capital too. Like, is there any thought to trying to refinance that out?
Higgs, you wanna take the
Hey, Tal.
The ratchet element?
Yeah, for sure. I can follow up with you in terms of the specifics of the elements of Magnetar. But in terms of current state, I think, you know, in terms of priority and cost, right? I mean, we have the 2023 debenture due 13, 14 months from now, which we're focused on. The MCAP preferred equity actually has a higher coupon rate today, and that one ratchets starting August first of 2023. In terms of coupon rate, that one is a little bit more expensive. I'd say that's where we're focused on.
Okay. You're free to, like, take that out at any point? Or is there a, like?
That's correct.
Okay, there's no.
That's correct.
Got it. All right. Perfect. Thanks, gentlemen. Appreciate it.
Thanks so much.
That does conclude the question and answer session for today. It also concludes today's conference. Thank you all for your participation. You may now disconnect.