Medical Facilities Corp
TSX:DR
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Good morning, everyone. Welcome to the Medical Facilities Corporation 2021 Third Quarter Results Conference Call. [Operator Instructions] Before turning the call over to management, listeners are reminded that certain statements made today in today's call, including responses to questions may contain forward-looking statements within the meaning of the safe harbor provisions of Canadian provincial security laws. Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. For information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements please consult the MD&A for this quarter in the Risk Factors section of the Annual Information Form and Medical facilities, other filings with Canadian security regulations. Medical Facilities does not undertake to update any forward-looking statements. Such statements speak only as of the date made. Please note that today's conference is being broadcast live over the Internet, and the webcast will be available for replay beginning approximately 1 hour of the completion of the call. Details on how to access the webcast replay are available in the morning's news release announcing the company's financial results. I would now like to turn the meeting over to Rob Horrar, President and CEO of Medical Facilities. Please go ahead, Mr. Horrar.
Thank you, operator. Good morning, and welcome to our third quarter earnings call. Joining me today is David Watson, our Chief Financial Officer. Earlier this morning, we released our third quarter results. Our news release, financial statements and MD&A may be accessed through our website at www.medicalfacilitiescorp.ca and have been filed with SEDAR today. We were pleased with our continued solid financial results over the first 9 months of 2021. Despite a surge in COVID-19 cases across the United States in the third quarter, our revenues were in line with Q3 of last year when we experienced a strong rebound in surgical case volumes following the first wave of the pandemic. Our volumes this quarter were short for 2019, were also impacted in the loosening of travel restrictions and the corresponding increase in provider vacations. Regardless of the first 9 months of 2021, our facility service revenue is up 12.2%, income from operations is up 12.3% and our EBITDA is up 7.3%. We've improved our financial flexibility during this time and have reduced our debt significantly over the past 2 years. As a result of this and our continued strong cash flow performance, we were pleased this morning to announce a 15% increase to our quarterly dividend, commencing with the fourth quarter dividend. The dividend is an important part of our commitment to maximizing total shareholder return. Additionally, the Board of Directors has approved implementing a normal course issuer bid for up to 5% of the corporation's issued and outstanding common shares, subject to the approval of the TSX. The fourth quarter is typically our busiest time of the year, and we remain cautiously optimistic about our outlook. We are monitoring volume recovery closely and are encouraged by the recent downward trend in new COVID cases across much of the United States. We also remain focused on our growth and continue to evaluate opportunities in our pipeline. With that, I would like to turn the call over to David to review our financial results for the quarter. David?
Thanks, Rob, and good morning, everyone. I'll discuss our financial performance for the quarter, then provide an update on our balance sheet and liquidity. But first, I'd like to remind everyone that all dollar amounts expressed in today's call are U.S. dollars, unless stated otherwise. Facility service revenue for the quarter totaled $96.4 million, a slight increase compared to the third quarter of last year, which, as Rob mentioned, benefited from a strong recovery in cases after pandemic restrictions were lifted. Our case volumes were down 2% from the same quarter last year. Although inpatient cases declined 21%, outpatient cases were up 0.7% and observation cases increased by 31.6%. Our total revenue and other income for the quarter was $99 million, an increase of $0.2 million or 0.2% from $98.8 million for the same period in 2020. Government stimulus income was in line with the same period last year. Operating expenses for the quarter totaled $82.5 million, representing an increase of $1.2 million or 1.5% compared to the third quarter of last year. Consolidated salaries and benefits were higher as a result of annual increases as well as industry-wide labor market pressures. The most significant expense variance was higher share-based compensation costs, which increased by $1.4 million driven by the strong appreciation in our share price. As a percentage of total revenue and other income, operating expenses increased to 83.3% from 82.2% for the comparable period. EBITDA for the quarter was $23.3 million or 23.6% of revenue compared to $24.6 million or 24.8% of revenue in the third quarter of last year. During the quarter, we generated cash available for distribution totaling CAD 7.5 million, resulting in a payout ratio of 29.2% compared to 17.1% in the prior year. We approached the end of the year with a strong balance sheet, improved financial flexibility and cash flow performance. As of September 30, we had approximately $63 million of cash equivalents. The outstanding balance on our corporate line of credit was $31 million at quarter end. Inclusive of lease liabilities, our net debt to equity stands at 0.51. We continue to be very well resourced to capitalize on potential growth opportunities, and our leverage remains significantly lower than our U.S. trading peers. Having weathered the most significant impact of the COVID pandemic, we believe we are well positioned to increase the return on capital to our shareholders, as indicated by the 15% increase in our quarterly dividend announced this morning as well as our intention to file for approval of a normal course issuer bid of up to 5% of the corporation's issued and outstanding common shares. This concludes my financial review for the quarter. For additional detail on our financial results, including specific results for each facility, please refer to our MD&A. With that, we'd now like to open the line for questions. Operator?
[Operator Instructions] And we will hear first from Endri Leno with Canada National Bank.
I'll start with the first one. Where are the cases or where were they in Q3 versus the pre-pandemic?
So compared to pre-pandemic, our surgical case volume is down, for the quarter, 6% compared to 2019. And 12% -- go ahead.
Well, I was just going to ask, I mean so -- is that 6% pre-pandemic and then you're adding another 2% from last year? Or does that 6% below also include that 2% decrease that you saw from last year?
I'm not sure I understand the question, Endri. We're down on a quarter-to-quarter basis. Third quarter of '21 is down 2% compared to third quarter of 2020 and compared to 2019, we're down 6%.
Okay, okay. No, that's great. That's good detail there.
I'll put a little color around that. We called out it was a strong kind of third quarter last year as all the restrictions lifted and there was quite a bit of volume that was coming through, Endri. Additionally, we've seen the Delta variant, this third quarter was an issue, and then we called out some provider. After a pretty couple of strong quarters, we had some providers that just took a break after the restrictions were lifted. So that's sort of some ebb and flow there.
Okay. And would you say those are also the main reasons why you are not yet at pre-pandemic levels? Or is there any more deferred care or the surgeries being performed elsewhere?
No, I think this is -- we know that they are deferred care. We see that a little bit, and you see that in some of the payer mix changes. Typically, higher acuity cases are deferring through a difficult surge with the Delta variant. So there will be some additional cases for that. So we're not seeing any issues on that migration for that.
Okay. So we can -- I mean, reasonably expect to return to pre-pandemic levels? Assuming there are no more surges and things of that nature?
Yes, assuming we don't have another COVID surge or another outbreak on that, I mean we continues to recover. As I said, it was just an unusual quarter after 2 strong quarters. We sort of took a pause in. We look -- looking where we are right now, it looks pretty good going into the fourth quarter. We're fairly cautiously optimistic on the fourth quarter.
Okay. Leading my next question. I mean that's good color for Q4. I mean, are you able to share any more detail there. Like would you be 95% below or closer to 100% pre-pandemic in Q4 so far? I don't know if you can share that.
No, really, we're not there yet, Endri. I think we just -- we've got a little bit of visibility, of course, on October. It looks like typically, the way our seasonality goes is the longer -- closer to the latter half of the quarter, it continues to pick up with December historically being the most significant part of that. So right now, we're seeing early indications that we're going to be in line.
Okay. My next question is it relates to the dividend increase. And the question I have is that if you are not yet at pre-pandemic levels, but let's say, we expect them sometime next year, but why increase the dividend at this point and not wait until you get back to 2019 levels?
Yes, Endri, that's a good question. I think when you look at our balance sheet, our balance sheet just continues to strengthen. Debt level continues to go down. We've got plenty of capacity in our line of credit. Our cash position is very good. So when you sell it at the right time given the strength in balance sheet and our comfort with the outlook going forward, we didn't feel that it was necessary to continue waiting.
Okay. That's good. And as I tie - I'm going to tie that dividend increase and then you're seeing the improving balance sheet, which it has, and it's great. But are you seeing any changes in growth opportunities, be it either for M&A or perhaps expansion?
No changes. We feel, again, our objective is a competitive and sustainable dividend and along with the ability to fund our growth projects. Our pipeline does remain very active and very -- you look at a lot of opportunities and you pass on the de novos that we've called out before take time to develop and syndicate and develop the relationships to move forward. And so we don't see any changes in the opportunities, if nothing, we've seen it's an increase in that.
Okay. Are you able to provide any color, like, let's say, versus vis-a-vis last quarter like Q2, I mean, have you advanced any more LOIs? Or have any talk -- any discussions on new de novos move forward? And any color you can share there?
We have quite a few discussions, Henry. And quite honestly, in the acquisition, especially in this business, you're partnering with physicians and a lot of cases, health care systems and some opportunities just take time to germinate and gain enough interest to move forward and some quite honestly, don't materialize. So the activity around that is significant, along with due diligence and things like that. So we walk away from a whole lot more than we actually get -- brought to ground. But again, it continues to develop and our pipeline is still very active.
We will now move on to our next question from Chelsea Stellick with IA Capital Markets.
I think Endri asked most of them, but just in terms of the outpatient cases, they seem to be in line with what was in the past. But I'm just wanting additional color on why we saw the 21% decrease in inpatient basis?
I think -- Chelsea, it's David. Rob touched on it with the -- part of it, I think is the spike in COVID cases and some of those higher acuity cases just holding back and deciding they're going to defer that care temporarily. But -- in addition, there is more of a trend to cases being done in outpatient cases. So there's some of that also.
And so is that something like we're probably going to see next quarter like a continuation about patient cases growing and inpatient cases kind of being constrained?
When you look at it year-to-date, it's less -- on a year-to-date basis, inpatient case volumes down a little under 9%. So right now, this seems to be a third quarter phenomena. I don't anticipate that we'll see the same level that we saw in the third quarter.
Okay. All right. And I guess just the last one. Is it safe to say that we see de novo ASC developments coming in before any large acquisitions in the next 6 months. That's sort of the...
Yes. Chelsea, I'll say again, we've got a lot of opportunities that we're looking at, and I just really wouldn't put a time frame on that right now.
[Operator Instructions] We do have a follow up from Endri Leno with Canada National Bank.
Just one last one for me. If you guys can talk a bit about labor tightness and how is it impacting you, if at all, especially nursing that we hear is pretty tight out there.
No. I think that's a good question, Endri. It's certainly very topical right now across the labor market in general and specifically, health care. I'd just tell you that there are pressures on wage right now on retention, and we're not unique. Health care is not unique. It's not really necessarily even geographic, it's fairly widespread. And right now, I would tell you that we will see some near-term pressure on costs. We don't have any barriers right now though we don't expect any impact going into the fourth quarter, but we'll probably see some a little bit of headwind on some interim costs to make sure that we still maintain our staffing. But there's definitely that. We also, Endri, I think for the most part, and our peers have called this out, too. We expect that, that will hopefully normalize into 2022. But it's a little bit of a headwind on the near term.
We'll now hear from Doug Loe with Leede Jones Gable.
Just kind of following on from Endri's question about labor market constraints. In your MD&A, you flagged that Sioux Falls experienced some softness in worker compensation, surgical cases and strike me as though that might be a trend that could also continue into 2022. So I was just kind of wondering what sort of trends you might be seeing on softness in that category of procedure and whether or not that might not be necessarily specific to Sioux Falls going forward.
Doug, right now, I think it's a 1 quarter aberration. I'm not ready to say that's an ongoing trend. I think we'll continue to monitor carefully, but certainly had some impact in the quarter, but not something that we're anticipating is going to be an ongoing issue.
Next question will come from Sahil Dhingra with RBC Capital Markets.
This is Sahil Dhingra for Douglas Miehm. I had 1 question. In terms of the government stimulus, it has increased quarter-over-quarter. Do you have any time line or what should -- what would be the future run rate for this?
Yes. So the government stimulus was a little under $200,000 on a quarter-over-quarter basis. We currently have about $1.5 million that's deferred on the balance sheet and will be recognized in future quarters. Beyond that, pending some new stimulus program, we don't anticipate seeing ongoing stimulus.
And at this time, there is no additional questions. I will turn the call back over to Rob Horrar for closing remarks.
Thank you. In closing, we'd like to thank our physician partners, nurses and all team members who deliver outstanding care to patients each and every day. And as always, we look forward to reporting on our progress again next quarter.
With that, ladies and gentlemen, this does conclude your conference for today. We do thank you for your participation. You may now disconnect.