Commonwealth a Bright Spot for Invesque, Symphony Portfolio Keeps Shrinking

Commonwealth Senior Living again helped Invesque (TSX: IVQ.U and IVQ) buoy an earnings period challenged by Covid-19.

The portfolio, which Invesque acquired for $340 million last year and now includes more than 30 senior living communities, saw an occupancy decline of just 10 basis points in the third quarter of 2020 while holding steady on resident rates. That helped drive a 370 basis point improvement in the operator’s net operating income (NOI) between the second and third quarters of this year — and that is before factoring in the impact of about $2.5 million in government aid, according to Scott White, CEO of Carmel, Indiana-based Invesque.

“Unlike some of the competitors in the industry that have had to cut rates to fill beds, Commonwealth has not,” White said Thursday during the company’s third-quarter earnings call with investors and analysts. “Most of the NOI improvement — 370 basis points — has come as a combination of both topline revenue growth associated with rate, as well as a very careful managing of expenses.”

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Roughly 75% of the company’s senior housing and skilled nursing properties have been impacted by the virus, and the number of residents with active cases ballooned to 700 positive cases in May and June. But the rate of Covid-19 cases in Invesque’s portfolios fell sharply between the second and third quarters of this year, and currently the company counts just 28 cases among residents and patients.

“This trend has remained consistent despite many states reopening, and a recent surge of Covid cases across the United States,” White said. “The status of reopenings within our portfolio is driven by state and local mandates, and many of our communities have reopened for in-person tours, small group activities, communal dining and are now allowing some form of family visitation.”

Still, the pandemic is expected to weigh on both Charlottesville, Virginia-based Commonwealth and Invesque for the foreseeable future. The operator will be challenged to maintain its current occupancy rates in the fourth quarter of this year, White added.

As of June 30, Invesque reported an average occupancy rate for its stabilized triple-net assets of 83%, and stabilized senior housing operating portfolio (SHOP) assets of 81%. The company owns or has a majority interest in a portfolio of 106 properties in the U.S., comprised of 71 assisted living and memory care facilities, 17 skilled nursing facilities, 13 transitional care properties, four medical office buildings, and one additional property held for sale. In Canada, Invesque has four senior housing and care communities and 11 medical office buildings.

Overall, Invesque posted funds from operations (FFO) of 20 cents for the third quarter of 2020, beating expectations set by analysts. The company was aided by its lower rate of Covid-19 cases, coupled with decent rent collections, according to BMO Capital analysts Joanne Chen and Jenny Ma.

“The current incidence rate is notably lower than the mid-May peak,” a Nov. 11 investor note authored by Chen and Ma reads. “Rent collection averaged 94% (SHOP: 99%/MOB: 93%/triple-net: 86%) in Q3/20, consistent with Q2/20’s 93%.”

Invesque’s share prices fell nearly 10% to land at $1.85 by the time the markets closed Thursday.

Covid-19 caution

Looking ahead to 2021, White was uncertain how big of an impact Covid-19 might have on the company’s portfolios. And regarding progress on a potential Covid-19 vaccine, White said he was cautious but optimistic.

“It’s just a matter of timing,” he added. “What the industry looks like on the other side [is] to be determined.”

Still, the company has taken steps to preserve liquidity and strengthen its balance sheet in the meantime, including by suspending its dividend on April 1.

Invesque’s executives have also taken pay cuts, reduced personnel costs and deferred non-critical capital expenditures for the time being. And the company modified its senior credit facility with KeyBank, increasing its corporate leverage covenant to 65% and growing facility pricing by 15 basis points.

The company also agreed to a non-binding memorandum of understanding (MOU) with tenant Symphony, which operates 16 skilled nursing facilities under a triple-net lease structure.

Under the MOU, Invesque has marked about half of those facilities for sale to Symphony or to be transitioned to a new operator. Invesque and Symphony will also enter into an amended and restated 15-year triple-net master lease, which will “substantially reduce Symphony’s share of [Invesque’s] rental revenue going forward.”

Invesque expects to close on the transaction during the first quarter of 2021. Once the transaction closes, the Symphony portfolio will represent less than 15% of the company’s NOI — a far cry from the roughly 70% rental NOI that Symphony contributed five years ago, White said.

“The pandemic has taken a meaningful toll on the operations of the Symphony portfolio, including reduced occupancy and increased operating expenses,” he said. “We have been working diligently with them for several months to address the immediate needs created by the pandemic, along with a long-term, mutually beneficial structure.”

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