Extendicare Inc
TSX:EXE
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Extendicare Inc
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Thank you for standing by. This is the conference operator. Welcome to Extendicare Inc.'s First Quarter 2024 Analyst Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions].
I would now like to turn the conference over to Jillian Fountain, Vice President, Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to Extendicare's 2024 First Quarter Results Conference Call. With me today are Extendicare's President and CEO, Michael Guerriere; and our Senior Vice President and CFO, David Bacon. Our Q1 results were released yesterday, and are available on our website, as is a live audio webcast of today's call, along with an accompanying slide presentation. An archived recording will also be available on our website following today's call. As well, replay numbers and passcodes for this call has been provided in our press release to access an archive recording until May 31.
Before we get started, please be reminded that today's call may include forward-looking statements or non-GAAP and other financial measures. Such forward-looking 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 as well as details of non-GAAP and other financial measures in our public filings with the securities regulators and suggest that you refer to those fillings.
With that, I'll turn the call over to Michael.
Thank you, Jillian, and good morning. We were very happy with our Q1 results. Our strong start to the year is a direct result of our strategy to grow our services business, while leveraging our joint ventures with Axium to support long-term care redevelopment.
Year-over-year double-digit growth in our Home Care and Managed Services segments, combined with the sale of another long-term care redevelopment project into the JV with Axium represent continued progress in our journey toward a less capital-intensive, higher-margin business model. The strategic transformation that started in 2022 has strengthened our balance sheet, providing us with greater flexibility in our capital allocation decisions. The demand for our services is clear with Managed Services segment NOI doubling to $8.7 million on a year-over-year basis.
Our redevelopment program has good momentum with the opening of Countryside, our new 256-bed long-term care home in Sudbury in March, the sale of our 256-bed or lease project into the Axium joint venture in April, and the sale of the vacated Class C home in Sudbury following the opening of [indiscernible] Countryside. Taken together, these transactions demonstrate efficient capital allocation as we recycle capital from the sale of replaced legacy Class C homes into new redevelopment projects that we pursued through the Axium joint venture, where we earn development fees during construction, then management fees to operate the home in addition to our 15% ownership interest. These transactions, supported by our strong operational performance helped strengthen our balance sheet in the quarter and improved our payout ratio to 69%, on a trailing 12-month basis. As we continue to execute on our strategic agenda and focus on delivering strong operating results, we are well positioned for growth across all our business segments in 2024.
As you can see on Slide 4, we delivered strong growth across the business in Q1, driven by increasing demand for the services we provide. In Long Term Care, Q1 occupancy levels increased 90 basis points to 97.5%, above the threshold for full funding at the home level. This is a strong result considering the seasonal impact the winter months can have on occupancy.
In Home Healthcare, we continue to drive strong growth with average daily volumes increasing 11.4%, from the prior year. Our volume growth continues to outpace demographic trends, as we work to address significant unmet demand for services. We expect this to continue throughout the year as home healthcare services helped to mitigate the significant capacity challenges faced by the rest of the health system. Our volume growth is a direct result of our focus on retention and recruiting to increase capacity. The success of these programs is evidenced by record high additions of new care staff in Q1, which gives us capacity for growth in future quarters.
In our Managed Services segment, we also saw strong results following the Revera and Axium transactions which closed last year. Net operating income doubled that of the prior year period and the number of Extendicare Assist beds grew 64% to just under 10,000 beds. The number of third-party and joint venture beds served by SGP increased year-over-year by 23.7%, driven by both organic growth and the strategic transactions.
After adjusting for onetime items, our managed services and home healthcare segments were responsible for 56% of NOI in the quarter. As we continue to execute on our redevelopment plan, we expect the proportion of NOI coming from services in these two segments to gradually increase. Rate increases are supporting margin recovery in long-term care as we recruit staff and reduce agency use. Increased care volumes, combined with rate increases drove continued improvement in ParaMed NOI margins. We expect these trends will continue to strengthen home care margins in the coming quarters. Managed services margins are in the 50% to 55% range, that we expect will be the norm for this segment.
Turning to long-term care funding on Slide 5. We've spoken for several quarters about the need to address the funding gap, that arose from the significant inflationary pressures on our operating costs. This gap put a strain on our operating margins in long-term care in recent years. In March, the Ontario government announced a number of funding enhancements that go a long way to address the impact of inflation. On April 1, the government implemented a 6.6% blended funding increase across all funding envelopes, resulting in incremental annual revenue of approximately $21.3 million. We estimate $12 million of this amount is applicable to the other accommodation envelope, representing an 11.5% increase, sufficient to address most of the inflationary gap and help to restore our net operating income to historic levels.
Additionally, in Q1, the Ontario government provided onetime funding of just over $2,500 per bed to help relieve financial pressures and address key priorities, including capital and operating needs in long-term care homes. As a result, we recognized onetime funding of approximately $12.2 million in the quarter, of which $9.2 million was retroactive to April 1 last year.
In addition to the operating funding changes, Ontario reinstated the $35 per bed per day time limited enhancement to the capital funding subsidy, which is available for all new projects that received government approval to construct before November 30, 2024. A significant investment in home healthcare was also included in the Ontario budget but rate details have yet to be announced. All of these funding increases will help return the seniors care sector to long-term financial sustainability.
On Slide 6, we detail the considerable progress we've made in recent months on our redevelopment program. We were delighted to open Extendicare Countryside at the end of March. This is our new 256-bed home in Sudbury held in the Axium joint venture. It was heartwarming to see the reactions of residents as we welcome them to their new home.
Subsequent to quarter end, we completed the sale of our fifth redevelopment project into the Axium JV for cash proceeds of $20.1 million. This is a 256-bed home under construction in the Ottawa area. Additionally, in April, we completed the sale of the vacated Sudbury Class C home for cash proceeds of $5.3 million. We now have five homes in the joint ventures with Axium, currently under construction in Ontario, consisting of 1,280 new beds slated to replace 1,121 Class C beds. We remain on track to open two of these homes later this year in Kingston and Stittsville, and anticipate closing the sale of the vacated Kingston Class C building for estimated proceeds of $3.8 million later this year.
We continue to advance our remaining 15 redevelopment projects in Ontario, consisting of 3,032 new beds that will replace 2,211 Class C beds. With the increased operating funding and the enhanced capital subsidy in place until November, we are targeting to begin construction on up to four new projects this year. Construction costs, interest rates and applicable regulatory approvals will be pivotal in determining whether and when new projects will meet the financial conditions necessary to proceed.
Given the pace of long-term care redevelopment in Ontario, the government has acknowledged the need for the Class C long-term care homes to remain in service beyond June 2025, when the current licenses expire. Accordingly, it is offering license extensions of up to five years to qualified operators. As such, we have submitted our request for license extensions for all of our remaining Class C homes, while we continue to progress our redevelopment agenda.
At this point, I'll turn it over to David Bacon to discuss our results in more detail.
Thanks, Michael. I'll start by reviewing our consolidated results for the quarter. As Michael mentioned, our Q1 results were impacted by a number of favorable onetime and out-of-period funding and compensation items. Keep in mind that last year's Q1 results were also impacted by onetime items, including COVID recoveries and prior period LTC funding. We've summarized these in the appendix to this presentation, and I reference them on the applicable financial results slides. Given these impacts when I speak to the year-over-year variances, I will include references to our results excluding the impact of these onetime items.
On a reported basis, consolidated Q1 revenue increased by 13.1% to $367.1 million. Excluding the impact of other period items and COVID recoveries, our revenues increased by $50.3 million or 17.2%, and resulting from operating improvements in all of our business segments, driven primarily by an increase in home health care, average daily volumes and billing rates, growth in managed services and improved long-term care occupancy levels. Our Q1 NOI increased $200,000 to $44.7 million with margin of 12.2%, compared to 13.7% in the prior year. Excluding the impact of the out-of-period items in COVID recoveries, our NOI improved year-over-year by $9 million or 34.9% reflecting the growth across all of our segments.
Our reported adjusted EBITDA for Q1 decreased by $800,000. Excluding the impact of other period items and COVID recoveries, our adjusted EBITDA increased by $8 million or 65.1%, reflecting the improvement in adjusted NOI, partially offset by modestly higher admin costs.
Our AFFO per basic share in Q1 was $0.21 compared with $0.24 in the same period last year. And on an adjusted basis, AFFO increased year-over-year by $0.04 per share to $0.12 in Q1.
Turning to our individual segments, starting with long-term care, excluding the impact of COVID funding received in Q1 2023 and an increase in a prior period funding, our revenue increased year-over-year by $19.8 million, driven by funding increases, timing of spending and our improved occupancy. NOI as reported declined by $8.4 million to $25.3 million, with an NOI margin of 12.3%. Excluding the net impact of COVID recoveries and increase in our prior period funding year-over-year, NOI increased by $400,000 as a result of funding enhancements and increased occupancy, partially [set] offset by higher operating costs. The corresponding NOI margins declined to 7.9% in the quarter from 8.5% last year, due in part to margin compression from higher flow-through funding levels and our higher operating costs.
As Michael mentioned earlier, thanks to the recent funding announcement from the Ontario government, the 11.5% increase in our OA funding is much needed recognition of the cumulative inflationary impacts we have been experiencing in many of our operating costs over the past few years. And the increase starting in Q2 will help to restore our NOI, which is critical to support the advancement of our redevelopment agenda.
Turning now to our home healthcare segment. Revenue in the first quarter increased by $36.1 million. Excluding the benefit of $13.6 million of revenue to support onetime compensation costs paid to our home healthcare staff, in connection with the 6.7% rate increase we received in Q4 of last year. Our revenue increased by $22.5 million, driven by 11.4% year-over-year growth in our volumes and our bill rate increases. NOI increased by $4.3 million to $10.8 million, and adjusting for the flow-through impact of the onetime compensation to staff in Q1, our NOI margin was 8.3%, an increase of 230 basis points over the same quarter last year.
Turning to our Managed Services segment. We reported significant growth in both revenue and NOI this quarter, thanks to the addition of the new homes from last year's Revera and Axium transactions and continued organic growth in SGP. Our Q1 revenue increased by $7.4 million or 76.5% and our NOI doubled to $8.7 million. This quarter's NOI margin was 50.7%, an increase of 550 basis points over the same period last year.
Finally, turning to our financial position. We ended the quarter with a strong liquidity position with cash of $91 million and access to a further $68 million in our credit facilities. In the first quarter, we successfully completed an extension to 2027 of approximately $20.4 million in mortgages that were maturing in 2025, further improving our maturity profile. Subsequent to the end of the quarter, we received cash proceeds of approximately $25.4 million from our redevelopment related transactions, which added to our liquidity position. Additional, and as Mike indicated, additional proceeds are expected from the sale of the land and building associated with the Class C home in Kingston, once the new home is open later this year. Our strong operating results, solid debt metrics and the added flexibility from our strategic transactions have us well positioned as we continue to assess our options for the convertible debentures that mature in the second quarter of 2025.
With that, I'll pass the call back to Michael for his closing remarks.
Thanks, David. A very positive start to the year gives us confidence that we have the right strategy and the team we need to execute against our plan. Continued growth and strong operating results demonstrate our ability to capitalize on the growing need for our services to drive shareholder value.
The operating funding increases in Ontario largely address the inflationary gap that has weighed on our operating margins in recent years. With the final funding increase to staff our homes to achieve four hours of direct care per resident day, we are well positioned to provide excellent quality care to our residents. These investments are critical to ensure the long-term care sector is on sound financial footing, enabling us to expand capacity to meet the needs of the growing seniors population. The need for the critical services we provide has never been more apparent, and we have never been better positioned to answer the call.
Of course, we could not do so without our dedicated team members, whose professionalism and compassion are central to achieving our mission of helping people live better. With that, we're happy to take any questions that you might have.
[Operator Instructions] Our first question comes from Jonathan Kelcher of TD Cowen.
First question, just on the long-term care. Just trying to get a sense of what a good quarterly NOI run rate is. So if you look at the $15.5 million, I think in the MD&A, you talked about the 11.5% increase, adding $12 million. Should we think of 15.5% as a starting place for that and being additive to that?
Yes, I'd say portion of that, the $12 million number is an annualized number. So just to clarify, I think that there'll be a large portion of the [$12 million] fall to the bottom line, but there still are cost increases that will go against that, as we think about as our collective agreements have increases that come throughout the year, they tend to be staggered. And so there is going to be some -- some of that doesn't fall to the bottom line. So I think that 15% is a reasonable starting point, but I wouldn't take the full $9 million through against. I think there's going to be some spending against that as we still have some increases coming later in the year.
$9 million or $12 million?
$12 million, sorry. I'm thinking in your contribution, sorry, Jon, I'm thinking in the 9 months so $12 million annually. Yes, just mixing the annualized versus [indiscernible].
so it definitely -- so we should sort of think $15.5 million [indiscernible] think about $17.5 million -ish is $17 million to $18 million. Is that a fair way to think about it?
Yes. We don't -- it will be north of $15 million. $17 million, $18 million I mean that's [indiscernible] -- it's not a bad number, but I mean, it's not -- we don't have a number or guidance that we give on that, but it is going to be north of $15 million.
Okay. I was just getting the right way to think about it. And then on the home healthcare, you've had two good quarters of volume increases in the sort of 3% ranges. Can we sort of think of that pace like -- I think, Mike, in your opening remarks, you talked about getting a bunch of new staff that's coming on in Q1. Can we think about 3% volume growth? Or does that pace slow?
So at some point, Jonathan, the pace will slow. And we're not sure exactly what that point is. And what it will slow to, is probably somewhere in the 5% growth per year, which is what we think the overall market will grow at, just because of demographic realities. But we are still seeing a considerable gap in care. There's still a considerable need that isn't being met across the healthcare system. So our view is that we're going to see an accelerated pace of growth at least for the next year, and we're just -- it's hard for us to see when that catch-up point is going to happen. But right now, I don't see any slowing down of that pace of growth.
And you're able to staff in order to accommodate all that growth? I guess that's the real question, right? Can your -- or your staff and your hours and as much, and you're [ seeing ] [indiscernible].
Yes, we're seeing -- I mean I made the comment that we added more people in Q1 than we have in any previous quarter. So we are able with our training programs and recruiting. On top of better retention, we're seeing lower attrition in our staff as well. So that is all combining to make for -- big increases in our capacity. So I think what you've seen in terms of the run rate over the last 6 quarters gives you an indication that we are able to find the staff and add capacity at that pace. I think that's a reasonable kind of growth expectation in terms of what we're able to do with our staff additions.
And then on the home healthcare increases, the funding increases that you are looking for from the government. Should we think of those as something that's going to be additive to NOI? Or will it be more like more flow through -- like just straight [indiscernible] [NOI]?
Hard for us to predict, Jonathan, because they haven't announced -- like they've announced a large quantum of investments in the sector, but we don't know how it will, kind of be applied. I think there's a very good chance that it will be an April 1 rate increase similar to what we've seen in previous years, which at this point, would be additive to our NOI to some degree. But certainly, we're increasing wages and increasing the staff complement. So exactly how that will play out really is going to wait to see what those rate increases are and how they're structured.
And then last one for me. You talked about potentially starting 4 new projects. Would those be -- well, I guess two parts here. Would those be on balance sheet or potentially in the JV? And secondly, how should we think about your total CapEx spend for this year?
Yes. And Jon, on your first part of the question, I mean our intention is to have those new projects start and be done in the JV, so it will just be more of a timing situation, in terms of just getting through a successful tender and if everything aligns, [ then ] we're going to move ahead on those projects, we'd be starting to process to move them into the JV, it will just be a question of timing, so it could be a bit transient. But they will end up in the JV. We're hoping a little faster than our [ Orleans ] project was. And we're working with Axium and the government around just trying to streamline that process, so that we can move things faster. So that's where the intention is.
In terms of CapEx for the year, I think there's no change in our kind of maintenance CapEx outlook on the growth, kind of CapEx side we're targeting the four projects. We don't know if all four will go through. We're in the tendering process now. It will take a couple of months to crystallize that. So if you look at sort of our cost per bed sort of in the $380,000 to $400,000 range, we have just under about 1,000 beds we're looking at doing. So call it $400 billion-ish of potential construction or 15% share of that. If you think about project [indiscernible] 75%. So you're talking about $100 million of equity. So our pro rata share could be somewhere between 10% to 15% depending on how many go, that's over the life of the project. So not really -- even if we greenlight the -- whatever subset of those four projects by year-end, the impact this year would be pretty modest from a growth CapEx perspective.
Our next question comes from Pammi Bir of RBC Capital Markets.
Most of my questions have been answered. Really just one follow-up in long-term care, when you [indiscernible] out the onetime funding that you picked up in the quarter, it did seem to drop. The NOI levels did seem to drop from Q4, while there is some seasonality in that. Was there anything sort of onetime related that might have impacted the quarter? And is there any sort of maybe reversal or adjustment anticipated, if at all, with respect to that in the next -- in Q2 or throughout the year?
Yes. Outside of the onetime in Ontario we adjusted for, I wouldn't say there's anything onetime in Q1. There's a couple of things weighing on the margin percentage, when you're looking at it either year-over-year or Q4. So on a year-over-year basis, the step-up in the flow-through funding impacts, probably accounts for about half of that sort of 60 basis point drop is really just all the added flow-through and funding from a year-over-year. But we are experiencing some elevated operating costs still, particularly in the West in our LTC operations, where we don't have the benefit of the flow-through kind of impacts. So some select homes in the West are still running at higher operating costs than we like, and we're working through those. There are a couple of markets in areas that still have agency, high agency use higher than we want it to be. But they're isolated to a handful of homes, but they do have a bit of an overhang. So I think as we move forward, they're not onetime, Pammi, but there's a lot of work and effort being going into focusing on those handful of homes to get the operating cost structure back in alignment.
The other last thing I'd add is we've got a lot of good news, and it's on the Ontario side on LTC in the funding and budget. We are still waiting for the April 1 funding increases in Manitoba and Alberta. And similar cost pressures, obviously, in the West with inflation. And a lot of hope that there's some recognition that we need a bit of a catch up there, too. So there could still be some news in the rate increases when they come, that might be [indiscernible] we're hoping for a bit of an outsized adjustment to rates and the less, to give a bit of recognition to the inflation pressures we're experiencing there as well.
So nothing really onetime just some good [ block and tackle ] work in the field on a handful of homes where cost structures still need to get aligned, and we're waiting for the funding announcements in the West.
I think in the West, with respect to, I guess, the funding increases that you're still waiting for, is there any sense that there may be again, a bit of a catch-up sort of onetime announcement? Or is it really just more forward-looking that you get a bump like you did in Ontario on the OA envelope?
I'd say the latter. I think the [indiscernible] expectations in the West are going to be more around prospective rate increases effective for April as opposed to something catching us up. I think that's probably how we feel at the moment.
This concludes the question-and-answer session. I would like to turn the conference back over to Jillian Fountain for any closing remarks.
Thank you, operator. That concludes our call for today. As a reminder, this presentation is available on our website as are the call-in numbers for archive recording. Thank you for joining us, and please don't hesitate to contact Investor Relations if you have any questions. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.