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 the Extendicare Inc. Second Quarter 2021 Analyst Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [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 second quarter 2021 results conference call. With me today are Extendicare's President and CEO, Michael Guerriere; and Senior Vice President and CFO, David Bacon. Our Q2 results were disseminated yesterday and are available on our website. The audio webcast of today's call is also available on our website, along with an accompanying slide presentation, which viewers may advance themselves. A replay of the call will be available later this afternoon until August 20. The replay numbers and passcodes have been provided in our press release, and an archived recording of this call will also be available on our website.Before we get started, please be reminded that today's call may include forward-looking statements. 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 public filings with the securities regulators and suggest that you refer to those filings.With that, I'll turn the call over to Michael.
Thank you, Jillian, and good morning, everyone. Before we get to our second quarter results, I will provide an update on our activities related to the pandemic. Thanks to the outstanding commitment of our team to protect themselves and those we care for, our ongoing vaccination campaign has been very successful. High rates of resident and staff vaccination have allowed us to welcome families and visitors back into our homes and none of our long-term care homes or retirement communities are currently an outbreak. As of August 5, more than 90% of our long-term care and retirement residents were fully vaccinated. 86% of our long-term care staff, 80% of our retirement staff, and 86% of our ParaMed staff have received at least 1 dose. As a result of our extensive education and awareness campaign, along with the provision of paid time off and expenses to get to a vaccination clinic, more of our staff are stepping up to be vaccinated each week. To complement our vaccination program, we are maintaining elevated staffing in all of our homes to address the continued need for screening, testing, and infection control protocols. Surveillance testing continues to play an important role in keeping our homes and communities safe, now with a particular focus on those who are not yet fully vaccinated. In our ongoing efforts to address the significant staffing challenges facing the industry, we've made significant progress expanding college partnerships and clinical preceptorships to ensure a strong pipeline of new PSWs.In the first half of 2021, we hired more than 300 new caregivers in ParaMed from the in-house HSW training programs we launched last year. We are also participating in various new federal and provincial programs aimed at expanding the senior care workforce in the long-term care sector. Currently, we have more than 250 students enrolled in extended care internships, and we plan to offer employment to them upon graduation. While we are encouraged by the progress this quarter on vaccinations and prevention of outbreaks in our homes, we remain vigilant in our ongoing efforts to protect our residents, clients, and staff from COVID-19. The experience of other countries demonstrates that the risk of a fourth wave in Canada, driven by the Delta variant is very real. We will continue our campaign to drive vaccination rates higher, and we will test unvaccinated staff and visitors in an effort to prevent the virus from reentering our homes.With that, let's turn to the second quarter highlights, starting on Slide 4. As the severity of the pandemic receded, the magnitude of its impact on our operations has moderated significantly across the company. With the dramatic decrease in COVID-19 outbreaks in Q2 2021, our pandemic-related spending decreased to $42.8 million, down from $58.1 million in Q1. However, our costs in the most recent quarter exceeded COVID-related government funding by $9.5 million. We did not receive any funding related to prior period COVID-19 costs in the quarter. We do anticipate that we will receive further funding for net COVID costs from the first half in future quarters. Restrictions eased in the latter half of Q2. And as a result, occupancy levels at our long-term care homes and retirement communities improved. This positive dynamic continued into the summer. We are very pleased with the continuing recovery of our home health care operations, with our average daily volumes increasing 3.7% from Q1, exiting the quarter in line with pre-pandemic levels. With the increase in volumes and our continued focus on back-office efficiency, our home health care NOI margins widened another 60 basis points this quarter.As you can see on Slide 5, we continue to advance our long-term care redevelopment program to replace aging infrastructure with new modern homes, designed to provide improved functionality, safety, and comfort for our residents. During the second quarter, we commenced construction of a new long-term care home located in Kingston with the completion targeted for the first quarter of 2023. This new 192 bed home will replace and expand an existing 150 bed Class C Home. The new Kingston project, together with our Sudbury project that commenced in Q4 of last year, we'll replace 384 Class C beds with 448 new beds at an estimated investment of $120 million. In May 2021, we successfully closed $95.9 million in construction financing to support these first 2 projects. This bolstered our strong liquidity position and more importantly, demonstrate support for the sector and the new Ontario capital funding program. We continue to advance a further 20 applications with the Ministry of Long-Term Care to replace the remainder of our C-class homes in Ontario. Not all of these projects are feasible under the current capital funding program. We continue to work with our industry partners and the government to address the shortcomings in the current program, which relate primarily to small projects and high costs in urban areas. In addition to Sudbury and Kingston, which are already underway, we have 7 projects in advanced stages of approvals with the Ontario Ministry, on which we hope to begin construction before the end of 2023.Moving to Slide 6. In our long-term care operations. the reduction in outbreaks and easing of pandemic-related restrictions resulted in a drop in COVID-19 related costs and an increase in admissions during the second quarter. COVID-19 related costs were $32.7 million in Q2, down 32% from Q1. Though these costs continue to exceed related funding, as I mentioned before, we anticipate receiving additional government funds to cover the shortfall in future quarters. Occupancy levels at our long-term care homes increased to 85.4% in Q2, up 250 basis points from Q1 this year. Lengthy waitlists for long-term care in many of the communities where we operate, we expect average occupancy levels to continue to increase as long as rates of COVID-19 in the community remain low. We will not return to full occupancy in homes with ward-style 3 or 4 bedrooms. We have limited admissions to a maximum of 2 residents per room in all of our homes. We expect funding in Ontario to continue at the current level for these ward-style rooms beyond August 2021 when the current basic occupancy protection funding expires, however, no formal announcement has been made to that effect as yet. While we are seeing steady occupancy improvements, it is likely that not all of our Ontario long-term care homes will return to levels above 95% -- 97% before the end of August. As a result, we may experience some reduction in funding for those few homes that do not achieve the required occupancy threshold. We continue our recruiting efforts to add frontline caregivers to our long-term care homes to support ongoing COVID prevention measures and the recovery of our long-term care occupancy levels. Increased staffing also positions us well to respond to the Ontario government's plan to provide funding for 4 hours of care per resident day. The sector is awaiting further details about the new staffing plan, which we anticipate will come later this year.Turning to Slide 7. Our ParaMed volumes have returned to pre-pandemic levels, up 24% from the worst-hit pandemic quarter in Q2 of 2020. Despite this recovery, we are still not keeping up with the demand due to ongoing workforce capacity constraints, particularly in nursing. Our Q2 average daily volumes were 25,264, up 3.7% from the prior quarter. Our NOI margins adjusted for pandemic-related items continued to improve this quarter, up 60 basis points to 7.9% when compared to Q1 of this year. The investments made in our cloud-based systems and our continued focus on improving back-office efficiency position us to support future volume growth without increasing overhead costs, enabling further margin improvement as volumes increase. Our pace of volume growth will continue to be moderated by the staffing challenges facing the industry. As I mentioned earlier, we are gratified by the progress of our PSW college partnerships and in-house HSW training programs, and we continue to focus on encouraging employees who have been on pandemic-related leave to return to work.I'll now turn to David Bacon, our Chief Financial Officer, to provide insight into our consolidated and segmented financial results for the second quarter.
Thanks, Michael. I'll start by providing an overview of our consolidated results for the quarter, followed by some financial highlights of our individual business segments and our liquidity position. As Michael mentioned, in Q2, we began to see a recovery in our LTC occupancy and a return to pre-pandemic average daily volumes and margin improvements in our home health care segment. Stabilized average occupancy in our retirement segment continued above 90% in Q2, with an uptick in our lease-up occupancy. And our other operations segment experienced 11.1% growth in third-party residents served by our SGP group purchasing operations in the second quarter compared to the prior year.Turning now to Slide 9 in our consolidated results. As in prior quarters, we have included a detailed schedule of the impact of COVID-19 on our revenues, operating expenses, NOI, and EBITDA in Slide 18. In Q2, our net COVID-related costs this quarter resulted in a net reduction in adjusted EBITDA of $9.5 million. We continue to receive funding support under various provincial programs, however, until the effects of the pandemic are fully behind us, we expect continued volatility in our results as the quantum and timing of the funding is not always known in the period the costs are incurred. Our consolidated revenue in the second quarter increased by 9% or $25.5 million from Q2 2020 to $307.4 million. This increase was driven primarily by a 24% increase in home health care volumes and increased COVID-related funding of $6.1 million year-over-year. Consolidated NOI was up $11.3 million to $31.3 million and represented 10.2% of revenue as compared to 7.1% in Q2 2020. This increase includes $7.7 million in Canadian Emergency Wage Subsidy payments received by ParaMed. Excluding the ParaMed wage subsidy, consolidated NOI increased by $3.6 million to $23.6 million and represents an NOI margin of 7.7%, up from 7.1% in Q2 2020. The increase is due primarily to improved volumes and back-office efficiencies in home health care and a reduction in net COVID costs, partly offset by increased cost of resident care and lower preferred accommodation revenue in our long-term care operations. Reported consolidated adjusted EBITDA increased $9.7 million from Q2 2020 to $17.8 million due to the impact of the ParaMed wage subsidy and the underlying improvement in NOI, partially offset by increased administrative costs due to higher wages and staffing, IT costs, and professional fees. Reported AFFO improved by $5.1 million from Q2 2020 to $8.1 million due to the improvement in adjusted EBITDA, higher share-based compensation, partially offset by higher current income taxes related to the ParaMed wage subsidy, and increased maintenance capital expenditures. Our quarterly results continue to experience volatility with the impact of COVID expenses and related funding. The estimated basic AFFO per share impact this quarter of our net COVID costs, after-tax was $7 million or $0.08 of loss per share. While the impact of the ParaMed wage subsidy on our AFFO this quarter was $5.7 million after-tax or $0.06 per share.Turning now to our individual business segments. Our long-term care operations in the second quarter saw revenue grow by $8.7 million or 4.9% to $187.2 million, largely driven by increased COVID funding of $7.9 million, partially offset by the timing of flow-through funding and lower preferred accommodation revenue that is not covered by basic accommodation funding protection. In Q2, our long-term care NOI declined by $1.3 million or 12% from the same period last year to $9.8 million, largely due to increased cost of resident care and lower preferred accommodation revenue, partially offset by a reduction in unfunded COVID costs of $1.4 million on a year-over-year basis. Excluding the net COVID costs, our LTC NOI margin was 10.5% this quarter. Overall occupancy in the quarter was down to 85.4% in Q2 2021 from 93.5% in Q2 2020, however, average occupancy improved 250 basis points from Q1 2021 as we have seen the successful impact of the vaccines drive significant reductions in COVID-19 outbreaks and the beginning of easing of restrictions on long-term care homes. Our LTC revenue has largely been protected with basic occupancy protection funding from the Ontario government and similar support in Alberta. As Michael mentioned earlier, while we are seeing a recovery in occupancy in our LTC segment, we may experience a reduction in funding for some of our Ontario LTC homes where the pace of our occupancy recovery may lag the elimination of the basic occupancy support as of the end of August.Turning next to our home health care segment. Revenue grew $15.6 million or 18.3% in Q2, driven by a 24% increase in average daily volume year-over-year, partially offset by a decline in COVID-related funding of $1.8 million. NOI in Q2 increased by $12.6 million to $14 million, representing 13.9% of revenue, reflecting the wage subsidy of $7.7 million, growth in volumes, and back-office efficiencies, in part offset by an increase in net COVID costs. Excluding the impact of the wage subsidy and net COVID costs, the NOI margin in Q2 was 7.9%, up sequentially from 7.3% in Q1 of 2021. Given the recovery in our ParaMed volumes, we do not anticipate qualifying for further wage subsidy beyond this quarter.Turning now to our retirement operations. In Q2, revenue, NOI, and NOI margins were up slightly. NOI increased 5.2% to $3.7 million as a result of improved occupancy levels of our lease-up communities, higher ancillary services, and rental rates, and lower year-over-year estimated net COVID-19 costs, partially offset by increased labor and promotional costs. Throughout the pandemic, our stabilized average occupancy has remained above 90% and averaged 90.2% in Q2, down 130 basis points from Q2 2020. The average overall occupancy of our portfolio was in line with Q2 2020 and increased sequentially by 30 basis points to 84.4% from Q1 of this year, driven by improvements in our lease-up communities, offset by a modest decline in our stabilized communities. Our lease-up communities ended the quarter at 73% average occupancy, up 350 basis points from March 31, '21. The resumption of in-person tours and easing of restrictions in the latter half of the second quarter has increased the level of activity in our retirement segment, and we anticipate improvements in our occupancy in the second half of 2021 if progress on vaccinations and the broader community continues.Turning to our final business segment. Our Assist contract services and SGP group purchasing services delivered revenue growth of just under 10%, largely driven by customer growth in SGP. Investments this quarter in the business to support our growth initiatives as well as a gradual resumption of pre-COVID activities, contributed to higher business development expenses this quarter, resulting in a year-over-year decline in NOI and NOI margins more in line with pre-pandemic levels. The underlying demand for our services remain strong, and SGP now supports over 83,500 third-party residents, an increase of 11.1% from Q2 2020 and up 3% from Q1 2021.Finally, turning to the last slide in our financial position. At the end of Q2, our consolidated cash on hand was $133 million, with $73 million in undrawn credit facilities and no scheduled debt maturities until the first quarter of 2022. As Michael mentioned earlier, we closed $95.9 million in construction financing for our Sudbury and Kingston long-term care redevelopment projects that are underway, further strengthening our liquidity position.With that, I'll pass the call back to Michael for his closing remarks.
Thank you, David. We are extremely encouraged by our progress this quarter, made possible by our successful staff and resident vaccination program and the outstanding efforts and dedication of our team. Our primary focus continues to be on protecting our residents, clients, and team members. Enhanced staffing levels, regular testing, and ongoing prevention measures will remain in place until the pandemic is firmly behind us. Extendicare has been delivering services across the senior care continuum for more than 50 years. We are committed to investing in our future with the construction of new homes, deployment of new technology, and training and recruiting of our people. Taken together, these will underpin our growth and enhance our capabilities to support residents, clients, and their families. Thank you for your continued interest and support.With that, we'd be happy to take any questions you may have. Operator?
We'll now begin the question-and-answer session. [Operator Instructions] Our first question is from Jonathan Kelcher with TD Securities.
First question, just on the other Canadian operations, and I think you touched on a little bit, David, in your commentary. So the margins were down versus Q1 and I guess, versus last year, did you say, business development or increased business development?
Yes. There's the -- in the current quarter, we've seen a bit of a return of activity. So our business development sales folks are back on the road, doing some travel. We've hired some additional staff, business development staff in Eastern Canada to focus on growth there where those are smaller markets for us. So we're seeing an increase with the cost there. I mean, the bed growth will come, but there is an increase there. I do think -- we have said in the past, our overall margins in that segment are sort of mid- 50s. So I think we did enjoy a bit of a higher margin prior to this quarter as we had increased management fees in our assist side of the business because of the COVID funding flowing through our managed contract businesses as well as a lower level of activity just in terms of the sales business development side. So I think the combination of the COVID funding may be slowing down within our customers as well as the increased business activity. So I think the margin is a bit of lumpy in the last couple of quarters, but I do think that longer-term mid-50s number that we've spoken about in the past is still a good number.
Okay. That is helpful. And just on the funding recoveries for long-term care, is there any indication from the government of how much you guys will eventually get back from prior periods?
What I can say there is, if you recall in Q1, in Ontario, our shortfall for Ontario was about $18 million, which we did receive in Q1. So they've given us no indication at the moment that they're going to change that approach. So our net COVID costs in Ontario in Q1 were about $18.4 million. So assuming that they continue what they did sort of catching us up for the net costs in 2020. That's kind of the level we'd be expecting for the first quarter. That closes off their fiscal year. We're starting in Q2, we're into a new fiscal year with the government. So still, again, no indication that they're going to change the approach, but we don't have that formally communicated yet in terms of exactly how their -- the new funding year money is going to come as it relates to sort of catching up on that COVID cost.
Okay. And how quickly does it come from? Well, I guess, as soon as they announced that you guys can book it as revenue in that quarter, right? So anywhere up to September 30 could be -- for Q3?
Yes. I think I'd like to think it's not going to lag more than two quarters. So we're hopeful that it's Q3. I think by the time we had the true-up and for last year, it came sort of early spring in -- for us, about 3, 4 months after year-end. So we're hoping that it's Q3. We'll have clarity by the end of Q3 on that.
Okay. And then your -- like currently with no outbreaks, how much extra are you spending on, say, a monthly basis or a quarterly basis, assuming the outbreaks, just your elevated staffing levels?
Yes. I mean, it's -- I hesitate to say what a normal run rate is because we -- every month has been different since the pandemic. But I think we were in where most of our spending is long-term care, we were $9.5 million in Q2 unfunded. We did see a $15 million drop in our gross costs. So I do think that we're approaching something that's going to be in the $20 million-ish range. But again, I really hesitate to talk about what we think is going to be because anything could change in a moment's notice, right? So we've seen a dramatic drop in the quarter by $15 million. But as Michael mentioned in his comments, too, I mean we're, still need to be cautious here, right, and keep our staffing levels up. I mean the funding -- we do think the gap should be narrowing between what we are being funded and our costs for the back half of the year once -- and then there's the catch-up element that we just spoke about. So I'm not so much sure what the costs are going to be. But I think the gap between funding and cost should regulate itself and be quite smaller, much more smaller than it has been, unless, of course, there's an uptick in the fourth wave.
The next question is from Pammi Bir with RBC Capital Markets.
Just with respect to your comments on maybe getting back to the 97% occupancy for long-term care, I guess, specifically a few homes. Is that going to get the timing issue? Or -- and maybe you get to in Q4 and say, Q3? Or is there something else that might have a recovery?
Pammi, it really is a timing issue. It's a question of whether the occupancy will recover by the deadline or take a little bit longer, but we don't have much doubt about the demand in long-term care across the province that it will ultimately fill up all the available beds. Just a matter of how long it will take us to get there. So we have a handful of homes where just looking at the trend line, we don't think we'll get there by the end of August, but we'll certainly get there in the subsequent months. So it's a relatively short period of time that we would be exposed to an occupancy-based clawback.
Got it. So it's just nothing specific, just no real issues with those properties. And maybe switching gears to ParaMed. Nice to see the, I guess, the continued recovery volumes there. Can you just comment on how volumes have trended post the quarter? And any thoughts on at what point do you think you may be able to secure sufficient staffing to meet the demand?
Well, closing the demand gap is a dynamic situation because we're seeing the demand itself steadily increasing over time. So even as we grow our capacity, we're seeing growth in the referrals that we're receiving. Our referral rates today are higher than they were pre-pandemic. So we're chasing the demand curve. We are, as you know, ramping up our training programs to -- in an effort to meet demand. And there's a big unknown of the people that are still on leave that went on leave at the beginning of the pandemic, we still have upwards of about 800 people that are on leave within ParaMed. So very difficult to predict when they might come back and in what numbers they might come back. Some of them may not come back. So there's still some pandemic-related dynamics there that are hard to predict. On the nursing side, which is a smaller component of our home care, we are seeing significant competition for nurses in the community because we're seeing expansions in hospitals, expansions in staffing for long-term care, and then, of course, the demand in home care. So registered staff in the nursing profession there are, are in a high, high demand situation. And I think that's been exacerbated by some of the limits on immigration that have resulted from the pandemic as well because we generally, in this country don't graduate enough nurses to meet demand. We depend on immigration to fill some of that. So of course, we're now receiving some impact of the pandemic in terms of the lack of immigation that's occurred over the last period of time. So all that said, Pammi, it's pretty hard to predict. We're really monitoring it month-by-month and ratcheting up our efforts on recruiting and training, in particular.
Got it. That's good color. Maybe just thinking about it another way, this might be a harder to answer, but do you have a sense as to how much of an increase in staffing, a percent of life, or even just absolute numbers that you would need to capacity even just the current volumes that you're receiving? Is like 1,000, and I don't know what the number is, but I don't know if you have any color on that.
Yes, it's a bit difficult just because of the dynamic nature of it. And if we were accepting more referrals, we would probably get more referrals. So it's not something that we have a really strong, really strong grasp of it. But that -- all that said, I would say somewhere in the 750 to 1,000 staff, we could probably put to work overnight if we were able to hire them.
The next question is from Tal Woolley with National Bank Financial.
Just sticking with ParaMed and the labor question for a second. How do you measure productivity, labor productivity, like what's sort of the preferred metric you look at?
Well, first of all, it's important to understand the model because the model is really a piecework model. So our staff are paid by the number of visits that they do. So we do measure the number of hours that each person does on a weekly basis. That's really important to our staff from an income perspective, but it's not a -- from a frontline perspective, our contribution margins are quite stable because of that dynamic in terms of the way of our people are paid.
And I guess then on that model, it kind of makes it hard to -- like, I guess what I'm trying to understand is like it sounds like basically to scale up this business, like it's a more bodies question. It's not a question of like improving the productivity per labor unit.
Well, actually, with our scheduling system, we've been able to increase the number of hours of service provided by each one of our individual caregivers by about 10% since we've put in the new system. That doesn't translate into any change in contribution margin. But of course, very important to our caregivers from the perspective of their efficiency, their income. And of course, from a retention perspective, that was a pretty important dynamic for us.
Okay. And then I'm just wondering, like with the bounce back in volume, too, like do you have any sense of whether like some of this might not just appear in a way, and I guess that there's more -- more than you can service right now. But I'm just wondering if there's been like maybe a consumer preference shift just because people don't necessarily -- people haven't had to be -- or people have not wanted to necessarily be going out to the doctor's office, going out to a rehab facility or whatever. And so given the choice to have those services brought to you, they're happily taking that right now, but maybe that shifts back the other way as things start to normalize?
No. That's not really a driver of home care services. Home care is more driven by the age demographic, by the prevalence of chronic disease in the community, and by hospital activity and hospital discharges. So there's very little individual preference in terms of driving volumes of home care that -- of the sort that we provide. I think that might be a little bit different in the private pay market. But in terms of the services that we provide, preference really isn't a driver of this.
Got it. Okay. Just for the long-term care redevelopment projects, you're quoting like redevelopment yields of like around 8% on the projects you've got on the go. That's the gross yield on that facility. Does that yield account for the shuttering of the facility that it's replacing?
No. That's the new project. I mean these redevelopment projects are -- there's -- both of the ones that are there are brand-new greenfield construction. They'll be quite a quick cutover in the -- from the old home to the new home. And then that's based and then the outlook is based on kind of the equivalent of a stabilized NOI outlook for the new home, similar to what we do, how we've looked at retirement.
And then, I guess, my question is on the redevelopment yield. Should we be quoting the incremental NOI over the prior facility that was in the market? Because of that facility...
Well, yes, we're not -- I mean, it's very hard to do that. We need to look at the new project discretely because the old project is some -- in most cases, the homes that we're closing are smaller. So we've got incremental new beds coming in as well as a change in mix between preferred as well. So that we're looking at 100% of the costs of building that new home against 100% of what the new stabilized NOI is going to look like on that home. So that's how we measure our projects.
Okay. But then I guess, just like when we're thinking about it, that we should remember that like all of those beds are not net-new, correct?
Yes. Correct.
All right. And then, like, I guess, since we are short long-term bed, long-term care bed in Ontario, like is it -- are they really going to like let these sites go down? Or will -- like to me, I would think like maybe one of the things to do is that if you have the demand, you would sit there and say like, hey, now that you've moved the facility, rebuilt it like go and redevelop the old one, again, to bring it up to standard? Like is that not an easier way of adding beds over time?
It's a good question, Tal. But the fact is that those homes are so old and so substandard from -- even from the perspective of just the number of square feet, gross square feet per resident, they're about half the size of new facilities. So there's really no opportunity to even renovate them in a meaningful way. So they will be torn down. There's no question about that. Now whether we dispose of that property or perhaps redevelop that location for a brand-new net new property, well, that will depend on what kind of volume the government is commissioning at the time that we make that decision. So there may be new -- net new homes that we haven't contemplated in our pipeline that the government wants at that particular time, we'll certainly look at that.
And your like development costs don't include any disposition proceeds either on some of these sites, on the old sites?
Correct. Yes.
Okay. And then now we're sort of inching our way back towards normalcy. Just going back to the retirement business, like this is a capital-intensive business. You guys are -- it's kind of a smaller business for you. Is retirement still core to the Extendicare group of businesses long term? Because it does feel like we might get a little bit of consolidation going on in the sector over the next couple of years?
Well, Tal, I think that -- just looking at this over the last 10 years, there was a long low in long-term care development really across the country. And we're now in catch-up mode, trying to deal with replacing the aging stock of long-term care and, of course, the demand for long-term care is pretty extensive. So we've talked about that quite a bit. So over the last 10 years, we spent time and energy focused on the private pay side and building a small retirement portfolio. I think today now with all the activity in long-term care, we're pretty focused on that. We'll have a lot of projects on the go on that side of the business. I think as long as that continues, we'll be very focused. Our development resources and team will be very focused on building long-term care. And so I think our -- any expansion in retirement will take second priority to the long-term care agenda.
But I guess, let me put the question a different way. Like is retirement is essential to the functioning of Extendicare as a unit of the business?
I think it's a key part of our portfolio. Remember that a lot of home care services are provided in retirement settings. So I think there's an advantage of the experience of running retirement homes because of the potential synergies there. So we see it as a very valued part of our business mix.
Okay. And then just lastly on Extendicare Assist and SGP. Just with all of the sort of volatility in long-term care right now, should we expect like that sort of segment to continue to kind of -- should we expect a little bit more volatility on that side going forward? Because I just noticed like in your presentation, you said like the EA beds were down a bit, and then SGP clients continued to sort of grow nicely. Like just wondering how we should think about that going forward?
Yes. I think -- I don't think there's going to be much volatility. I mean, again, it's relatively smaller segment. So smaller changes do look more volatile there. But I think the SGP growth will continue. We -- as I said, we've added the reason, we've added business development resources there because we do think there is an opportunity there. So we do expect that to continue. There's a lot of demand for our services and products that we provide through SGP. Assist has been, I'd say, has been in a bit of a wall, certainly with COVID, not a lot of people making management changes and decisions in their portfolios. I do think there is some opportunity in that segment as we get out of COVID, where perhaps smaller, midsized operators after they've kind of come through COVID, they reassess their desire to continue to manage their real estate. And so I do think there's an opportunity. I also think there is an opportunity to manage retirement as well potentially. So another sort of tie-in to Michael's earlier comments about where retirement fits into our portfolio. So I don't think there'll be as much volatility there really. I think that -- I wouldn't read too much into kind of the lumpiness in the last couple of quarters. But I do think there's good growth prospects there in those sort of mid- 50 margins, which is what we've talked about before, is really how to think about that business.
Okay. That's great. Thanks very much, everybody.
[Operator Instructions] The next question is from Yash Sankpal with Laurentian Bank.
So you partly answered this question, but I want to try it one more time. Would you be able to quantify the cost you are incurring at each facility because of the extra safety measures you are taking? Are they 5% higher, 10% higher than what you -- what the typical operating cost was before the pandemic?
Yes. Yes. I mean, it's been very volatile, Yash, as you can appreciate, right? So if you think about even just this quarter, our costs are down $15 million from Q1. It really is quite hard to talk about anything being normal at this point. We've had such volatility. I think if you think ahead to the cost structure and we're -- the sector is waiting, for example, for the 4 hours of care and that to begin. If you start thinking about that, that increase, I mean, that represents about a 25% increase in the care envelopes. So -- and if that phases in over 2 or 3 years, we think the cost structure, again, funded through flow through envelopes mind you, but the cost structure is going to change on the care side, 8% to 10% a year over the next 3 years. We're at a point right now where we're maintaining enhanced staffing levels for COVID and for prevention in the protocol, testing, et cetera. We're running our staffing at about 110% of our normal level. We think that dovetails nicely to what could be the first wave of moving to 4 hours of care. So trying to quote a specific number of what our run rate is going to be is very hard. But we are conscious of the fact that we're waiting for the 4 hours of care, and we're hoping that some of the elevated costs we're incurring today around COVID actually sort of naturally dovetail into the first step of moving to 4 hours of care. And that would be, as I said, about a 25% increase in the nursing and program envelopes today.
Yash, if I can just add something to what David said, I just want to reiterate something he said earlier, which is important. Our total COVID extra costs in 2020 were fully funded in Ontario. So despite some of the timing differences, indications are that most of our COVID costs, if not all, are likely to continue to be fully funded. So I think that's the other sort of element here to take into account. And as David said, we'll be moving into a different era of higher staffing because of the government's 4 hours of care funding announcement. And so I can't be sure, but there's reasonable expectation that we will seamlessly roll into that new funding program. To be able to absorb the additional staff, we see those extra staff as being a head start on the challenge of staffing up to meeting that new requirement. So subject to timing differences and subject to learning what the implementation rules are, which haven't been shared yet. We do think that these costs will be fully funded.
Okay. All right. Just want to think about these new facilities that you're building and development yields that you're talking about. Based on your knowledge of appraisals by either mortgage lenders or private transactions, where do you think these newly built facilities trade at this point?
Well, I think -- I mean, what we see in the -- there hasn't been a lot of activity, right, in terms of trades and long-term care. There's been some smaller trades with older homes that trade more on a per bed basis versus a cap factor. I think most of the industry guidance out there now from the Cushman's and CBRE's that are the sort of leaders that follow the segment would have long-term care A class type new beds in the -- depending on the market in the 7%, 7.25%, although it's pretty robust out there. I mean, if the market was tested with some other A-bed homes, perhaps that you're dropping in certain markets, maybe on long-term care, could even be a bit tighter. But probably in the 7%, 7.25% is what we -- what the -- those that track it, on the industry sort of view of it is. But again, hasn't been tested, there hasn't been much trading going on at the moment. But that's the best sort of view of the market we have.
Okay. That's good. And the long-term care ward beds, do you think the government would ever allow more than 2 residential room now going forward?
I don't think so. It's hard to predict, Yash, but I don't think so. I think we've seen the impact of those rooms on making it very difficult to manage outbreaks of COVID-19 or really any other types of outbreaks. So I don't expect that to be something that we revert back. That said, I mean, be aware that for Extendicare, this is a very small number of beds, right, across our whole operation, it's less than 300 beds.
Okay. And if, let's say, that turns out to be true, what would be your effective occupancy rate when your buildings are full? Like will it be 95%, 93%, like?
Yes. Yash, I think we would expect -- I mean, again, we don't know, but -- and this is the occupancy, we do expect or anticipate that the 3 and 4-bed ward rooms would be removed from the calculation. So I'm not -- I don't suspect they'll keep measuring us against that 97% target requirement for occupancy and still include the 3 and 4 beds in the denominator. So that's our anticipation that when they do clarify how things will be measured post-August, we expect those to be excluded. So they'll almost go into advance and sort of come out of all the calculations and statistics, but we don't know that for sure, but that's what we expect will happen.
This concludes the question-and-answer session. I'd like to turn the conference back over to Jillian Fountain for any closing remarks.
Thank you, operator. That concludes our call for today. This presentation is available on our website as are the call-in numbers for an archived recording. Thank you, everyone, for joining us today. Please don't hesitate to give us a call if you have any further questions. Goodbye.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.