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Edited Transcript of IVQu.TO earnings conference call or presentation 15-Aug-19 2:00pm GMT

Q2 2019 Invesque Inc Earnings Call

TORONTO Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Invesque Inc earnings conference call or presentation Thursday, August 15, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adlai Chester

Invesque Inc. - CIO & Director

* Bryan E. Hickman

Invesque Inc. - SVP of Investments

* Scott Higgs

Invesque Inc. - CFO

* Scott Eric White

Invesque Inc. - Chairman, CEO & President

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Conference Call Participants

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* Bradley Sturges

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Chris Couprie

CIBC Capital Markets, Research Division - Research Analyst

* Tal Woolley

National Bank Financial, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to Invesque's Second Quarter 2019 Earnings Conference Call.

I will now turn the call over to Scott Higgs, Chief Financial Officer. Please go ahead, Mr. Higgs.

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Scott Higgs, Invesque Inc. - CFO [2]

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Thank you, Cheryl. 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 1:00 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 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'll hand it over to Scott.

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Scott Eric White, Invesque Inc. - Chairman, CEO & President [3]

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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 cost 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 health care 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 and his team's 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 a 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 was 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 fourfold since our IPO a little over 3 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 priced capital through a partial disposition to continue our growth.

Now that I have discussed initiatives in our portfolio, let me comment on some of the important industry themes. Supply continues to be a 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 supports 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 as high as 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 midsized markets. By focusing our efforts on midsized markets, we continue to source sizable, scalable and high-quality opportunities at a discount to replacement cost, just like we did with the Commonwealth transaction.

Our regional focus has allowed us to avoid exposure to elevated supply and capitalize on the arbitrage of buying existing stabilized assets for cheaper than it will cost to build them. We'll still invest in development, like you've seen us do with Ellipsis, but we'll be very selective in the opportunities we choose.

While we do not believe supply concerns are a 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 would trend consistently higher through the next decade with the growing faction of the 80-plus population.

On the skilled nursing front, we remain cautiously optimistic about our portfolio of post-acute focused skilled nursing facilities. The Centers for Medicare & 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 a recent announcement that Illinois will increase Medicaid funding to skilled nursing facilities by $240 million in the next fiscal year. Of this $240 million, $170 million of the increased funding will go toward 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 toward 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 increased CMS market rates, the increased 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 about what we've accomplished here to date. We have executed on our robust pipeline and now are turning our focus toward enhancing the value of our current portfolio.

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

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Scott Higgs, Invesque Inc. - CFO [4]

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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 DRIP participation was approximately 81% for the 3-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 2 primary factors. First, we continually assess the value of our portfolio, we analyze changes in the cap rate environment used 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 that it's an 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 3 years. With volatility in 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 lower our effective interest rate by 20 basis points from the first quarter. One example of capitalizing on market prices -- pricing, including locking in the interest rate at our new credit facility underlying the Commonwealth transaction at a very attractive 3.84% throughout its initial 5-year term, which will also help to blend down our overall average borrowing rate. We will continue to refresh our debt stack strategically and enhance the profile for both Invesque and our partners to strengthen our platform over the long term.

Let me expound on the balance sheet side 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 in -- of mortgage debt, the issuance of approximately $65 million of convertible preferred shares and the remainder funding for cash.

The convertible preferred shares have a conversion price of $9.75, thus allowing us to effectuate the transaction at a better cost of capital than our current stock price would imply. The structure of the transaction, combined with the favorable debt market pricing, will allow us to consummate the transaction at an excess of 200 basis point spread to our 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 assets, 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 have 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.

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Adlai Chester, Invesque Inc. - CIO & Director [5]

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Thank you, Scott. The performance of our stabilized triple net portfolio remained consistent with previous quarters. On a trailing 12-month basis, as of March 31, our EBITDAR and EBITDARM coverage ratios were 1.2x and 1.5x, respectively. Our trailing 12-month occupancy as of March 31 stood at 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 already have significant relationships. We are confident in their ability to drive performance in the former Greenfield portfolio by implementing their operational expertise and creating synergies with the Invesque assets they currently operate. The Greenfield transition showcases our relationship-driven approach to investing 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 transitioned by year-end, pending regulatory approval and the satisfaction of other customary closing conditions.

We will also expand our relationship with Heritage by transitioning 2 Greenfield assets in Pennsylvania and New Jersey to them. The assets are in markets where Heritage already successfully operates buildings in partnership with Invesque. Accordingly, we expect additional market density as a result of these transitions 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 2 years.

The transition is 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 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 3 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'd like to thank everyone for joining the call, and we'll now open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brad Sturges, IA Securities.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [2]

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Just on the Greenfield transition, what would be the cost to Invesque for the acquisition, I guess, of the properties?

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Adlai Chester, Invesque Inc. - CIO & Director [3]

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Yes. So for all of their various interest in the 13 properties, we paid a $4.5 million payment.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [4]

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

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Adlai Chester, Invesque Inc. - CIO & Director [5]

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

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [6]

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Okay. And with Heritage, would that lease just be assumed? Or is there potential changes to the lease -- the leases?

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Adlai Chester, Invesque Inc. - CIO & Director [7]

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Yes. The thought would be we're probably going to be shifting that more to a joint venture with Heritage.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [8]

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Got it. In terms of the acquisition cost abandoned, the due diligence costs, any color on what -- why that deal wasn't pursued or why the write-off right now?

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Scott Eric White, Invesque Inc. - Chairman, CEO & President [9]

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Yes. Brad, it is -- given the pace that we've grown, we obviously have to look at an awful lot of things to be able to grow to almost $2 billion in 3 years. And we have to make a strategic decision about how far and how much cost to incur before pulling the plug. This is something that, I think, has gone on for, I think, 9 to 12 months, quite frankly. And we -- as in every deal, you 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, the one that's on the table. And as a result, we took the appropriate conservative accounting treatment and wrote off all the cost associated with it. Doesn't mean that, that deal or something similar to it 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.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [10]

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Got it. And I guess you talked about -- and 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?

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Scott Eric White, Invesque Inc. - Chairman, CEO & President [11]

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Yes, absolutely. One of the key things that I mentioned in the last quarterly call, and then I highlighted again today, and I want to highlight even with greater emphasis right now, when you reflect back on growing as fast as we have, again, 3 years, almost $2 billion, I just recently had someone do the calculation, we've grown at a 53% annualized CAGR, which is the fastest-growing real estate company in the -- relative to any of the U.S. comps and probably #1 or maybe #2 relative to any of the Canadian comps. When you grow that fast, it's now time to step back and say, "Okay. We've assembled the portfolio. We've accomplished our goal of diversification. We've accomplished our goal of scale. Now you really emphasize 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, "What's part of our long-term strategy now? Now that you've assembled the size of a portfolio, what doesn't belong longer term?" And when we think about that, we think about which operators do we have the ability to grow with. We think about strategically what fits into the portfolio. You should expect to see a few sales in the coming quarters, and really small, one-off buildings that just don't make sense, where obviously -- or continue to be in growth mode, so you shouldn't expect massive dispositions. It's hard to be in growth mode while you're selling. But you also need to be smart about maximizing value. And right now, there are certain assets on our portfolio that, we think, don't make sense long term in terms of maximizing value and creating value for our shareholders.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [12]

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Right. 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?

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Scott Higgs, Invesque Inc. - CFO [13]

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So pro forma, it's right around 60%. And as we've 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 refinancing. Then I think, over the long term, I still do think the 50% to 55% of the long term for this vehicle makes sense. But in the interim, we're comfortable with where we're at.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [14]

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And for triple net leased assets, where would be the financing cost today?

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Scott Higgs, Invesque Inc. - CFO [15]

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In terms of the cost of it?

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [16]

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In terms, like, where you'd be able to borrow at today, I guess, in the market?

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Scott Higgs, Invesque Inc. - CFO [17]

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Yes. So the most recent transaction is the Commonwealth deal that we just priced at a 5-year fixed at 3.84%. So blended today on the portfolio, it's right around 4.5%. But I think that's -- that -- you'll see that trend down a bit as we go.

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Scott Eric White, Invesque Inc. - Chairman, CEO & President [18]

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Brad, given the current state of the net markets and the cost of that -- remember, at its very core, a lot of what we do is spread investing. And our ability to create opportunities, like the Commonwealth opportunity, where we can get it at a reasonable price and then spread invest, as we said, in that case, it was north of 200 basis points, we're not afraid of leverage. We understand that the equity markets have sort of set an expectation and a pseudo cap in terms of where we could be. Plus, our lenders have set a very clear legal cap of 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 a -- we consider our growth trajectory taking advantage of very favorable leverage markets is part of our continued growth and strategy.

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Operator [19]

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(Operator Instructions) Our next question comes from Chris Couprie from CIBC.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [20]

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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 -- like, what's the rationale, I guess, for them to exit?

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Scott Eric White, Invesque Inc. - Chairman, CEO & President [21]

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Yes. So Chris, this has been -- as part of our cost to monitoring the portfolio, and as I said before, in terms of maximizing value, we talk to all of our operators on a regular basis. We have a dedicated team of professionals, a portfolio of 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 6 to 9 months, where we knew what some of their strategic goals are. And it's hard for me to speak on their behalf in terms of what their strategic goals are. But I think, as a general proposition as a company, they were looking to reduce their exposure in certain areas. We, as a company, were looking to grow. Commonwealth was an opportunity that was in our sights. And it really just lined up quite perfectly, to be honest with you. 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. It was a great opportunity for us. It was 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. It's right in their backyard. And when you put the sum of the parts together, it was a massive, massive value-creation opportunity.

As we mentioned in the script, you could see on an FFO 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 of everything lined up and just worked.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [22]

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So had -- like, had this Commonwealth transaction not be in the equation, was there still a plan to transition the operator?

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Scott Eric White, Invesque Inc. - Chairman, CEO & President [23]

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Not necessarily. We -- again, both have begun on now for, I'm saying 6 months, but now I think that's probably closer to 9 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 we might have sold some of those assets? Yes, it's possible. Is it possible we might have replaced the 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 require 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. When everything sort of lined up in terms of, "Wait a second. It's a phenomenal operating business. We'd like to have operational expertise in-house. We're looking to expand the offerings and the strengths of income to our business. And we have a great portfolio of spectacular buildings that happen to be in Commonwealth's backyard," It all sort of just lined up. And that's why we went down this path.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [24]

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What's occupancy like in that Greenfield portfolio?

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Adlai Chester, Invesque Inc. - CIO & Director [25]

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Low -- call it, low 80s, about 83% -- 82%, 83%. So we see some upside in several of those buildings, especially with Commonwealth coming in, in the portfolio.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [26]

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Okay. And then just on that point. So you've increased 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?

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Scott Higgs, Invesque Inc. - CFO [27]

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

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Scott Eric White, Invesque Inc. - Chairman, CEO & President [28]

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Yes. 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 the next couple years, we'll become predominantly an operating company. That is not in our strategic plan. So I think as Higgs said, in that 25%, plus or minus a few, is probably where you should expect us to be. Will we be comfortable increasing? Yes. Should you expect us to become a predominantly operating company? No.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [29]

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

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Scott Higgs, Invesque Inc. - CFO [30]

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Correct. Right.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [31]

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

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Scott Higgs, Invesque Inc. - CFO [32]

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It doesn't. Sorry, that was just direct, wholly owned 100% Greenfield and Commonwealth. So including the JV, that's closer to 35% -- 35% to 40% probably over the longer run, including some of the other transitions here, but 35% to 40%.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [33]

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Okay. Great. And are there any other operators that you're looking to -- that could transition into the -- or sorry, the Commonwealth platform, whether it makes sense or because there's just some type of issue that lends itself to that?

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Adlai Chester, Invesque Inc. - CIO & Director [34]

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Not issues. What I will say is when we acquired it, one of the first questions we asked 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'll 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.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [35]

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Okay. Got it. And then the reason that those handful were over to Heritage, was it just the markets they were in?

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Scott Eric White, Invesque Inc. - Chairman, CEO & President [36]

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Yes.

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Adlai Chester, Invesque Inc. - CIO & Director [37]

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

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [38]

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

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Scott Higgs, Invesque Inc. - CFO [39]

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Yes.

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Operator [40]

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And our next question comes from Tal Woolley from National Bank Finance.

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Tal Woolley, National Bank Financial, Inc., Research Division - Research Analyst [41]

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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, in talking to your operators, that was surprising? And do you have any better sense of what your risk is on a transition to this new system?

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Bryan E. Hickman, Invesque Inc. - SVP of Investments [42]

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Okay. 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 complex patients that aren't exclusively rehab. And that's fundamentally what the PDPM model is, created to incentivize from a care perspective. I'd say the increase to the Medicare rate was also generally favorably received. 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 that provider states has been 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, that was announced last month.

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Operator [43]

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And our next question comes from Chris Couprie from CIBC.

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Chris Couprie, CIBC Capital Markets, Research Division - Research Analyst [44]

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Sorry, just one follow-up. You've kind of alluded to it in your opening remarks with respect to Magnetar and the -- a new series of prefs. Number one, how should we think about the potential timing of that subscription taking place? And then number two, noticed that they're 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?

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Scott Higgs, Invesque Inc. - CFO [45]

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

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Operator [46]

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And our next question comes from Brad Sturges from IA Securities.

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Bradley Sturges, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [47]

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Just one question on the accretion provided. Is that based on in-place occupancy right now? Or are you assuming some further improvements?

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Scott Higgs, Invesque Inc. - CFO [48]

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It's including a modest improvement, but it's basically in-place NOI. But one thing important to comment on there is it does include full-boat CapEx on those portfolios that we're on, the Commonwealth portfolio that we'll have. So that reduction is included in that AFFO number.

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Operator [49]

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And there are no further questions in the queue at this time. I'll turn the call back to the presenters for closing remarks.

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Scott Eric White, Invesque Inc. - Chairman, CEO & President [50]

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Well, thank you, everybody, for joining us. Appreciate the continued interest, and we'll talk to you next quarter. Take care.

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Operator [51]

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Ladies and gentlemen. This concludes our call. You may now disconnect.