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. Second Quarter 2023 Analyst Conference Call. [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 2023 results conference call. With me today are Extendicare's President and CEO, Michael Guerriere; and our 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 in the company slide presentation, which viewers may advance themselves. A replay of the call will be available later this afternoon until August 25. The replay numbers and passcodes have been provided in our press release, and an archived recording of this call will also be made 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. Q2 put more distance between us and the pandemic. There was steady improvement in our operating metrics as we gradually return to more normal operations. Revenue increased in each of our business segments, driven by funding enhancements and increased volumes impairment.
As COVID outbreaks declined throughout the quarter, average occupancy in our long-term care homes improved 60 basis points from Q1 to 97.2%, up 470 basis points from the same quarter last year. This is approaching pre-pandemic levels. We continue to wind down the elevated staffing levels that were needed during the pandemic in our long-term care operations. As COVID-19 funding support have been withdrawn and related operational requirements have been relaxed.
Our cost structure remains elevated as we work to reduce the use of higher cost agency staff and adjust staffing levels to align with the new direct care models introduced by the provinces. These factors put pressure on our long-term care margins in the quarter. We are also experiencing inflationary pressures only partially offset by rate increases. We continue to work with the government and sector partners to address the gap in funding in an effort to return long-term care margins to historical levels.
Our Home Care Healthcare segment continues to gain traction, with its third consecutive quarter of volume growth. Demonstrating strong demand for services and increased success in attracting and retaining care staff. Average daily volumes increased 4.1% from the previous quarter, up 7.7% from the same period last year. We expect strong demand for services to continue, supported by the underlying demographic trends.
Concurrently, home care operating margins are recovering, thanks to our scalable technology-enabled back office and rate increases from the government. Note that we expect pre-pandemic seasonality in our service volumes to return. This typically includes a small drop in volumes in the third quarter as summer vacations temporarily reduced delivery capacity and certain client programs are suspended.
Finally, in our Managed Services segment, we continue to experience strong growth in our SGP customer base this quarter, which increased 3.3% from Q1 and up 12.9% from the prior year period. David will comment in a few minutes on how we have redefined the key performance indicators for our Managed Services segment, and updated them to reflect significant changes in our customer base that occurred subsequent to quarter end. The revised definition better reflect the range of services we provide to our clients as we increase our strategic focus on this segment.
Subsequent to the end of the quarter, we received regulatory approval for our Revera and Axium transactions. Together, these transactions mark a significant milestone in Extendicare's strategic repositioning to focus on growth in our long-term care and home health care segments using a less capital-intensive higher-margin business model. The Revera transaction closed on August 1, adding 56 long-term care homes and approximately 7,000 beds to our higher margin managed services portfolio. As well, we acquired Revera's 15% interest in a joint venture partnership with Axium that holds 25 of those homes.
The aggregate consideration net of holdbacks totaled $69.7 million, in line with our prior announcements. The transaction brings together two of the most experienced senior care teams in Canada and leverages our combined scale and expertise to drive improved performance and advance the delivery of high-quality care for Canadian seniors.
As we move forward, these transactions position us to be a driving force in building more and better homes to care for the needs of those seniors who can no longer have independently. Included in the Revera transaction is the right to acquire either alone or with Axium, any C bed homes that are redeveloped by Revera, giving us the ability to further scale the joint venture.
An integration program to bring the two businesses together is now underway. It involves bringing the operation to the 56 homes and over 9,000 staff into alignment with the Extended Care network. We expect the full integration of the Revera Homes will be complete by the end of 2024, with estimated strategic transformation costs of $14 million to $16 million to be incurred over the next 6 quarters.
The recurring fees earned for managing both the Revera Homes and the homes held in the Axium joint venture, together with the increased SGP revenues from serving an incremental 7,000 beds will be reflected in our managed services revenue. Subsequent to quarter end, we also received government approvals to form a new joint venture with Axium in respect of our own redevelopment projects in which Axium will own an 85% interest with Extendicare retaining a 15% managed interest.
We have amended the purchase and sale agreement with Axium to include our 256-bed Peterborough long-term care home that commenced construction in May. We anticipate closing the Axium transaction in the third quarter subject to customary closing conditions, transferring to four redevelopment projects we currently have under construction into the joint venture.
This partnership with Axium provides us with the foundation for a more capital efficient business model for the redevelopment of our own C class homes. We will continue to undertake all development activities in respect of these homes and earn development fees from the joint venture for managing construction.
While legacy C bed home revenue and NOI will be eliminated from our long-term care segment as the old C bed homes are replaced, we will provide managed services to the JV to operate the homes upon completion of construction, resulting in recurring management fees.
We will also retain a 15% interest in the earnings of the homes within the JV and have options to monetize the decommissioned buildings after the C homes close. Our intention is to utilize the joint venture partnership to provide the capital needed to drive growth in our Managed Services segment through development projects and opportunistic acquisitions.
Moving to Slide 5. During the second quarter, we broke ground on our new 256-bed home in Peterborough. This home will replace our existing 172 bed Class C home in that community and marks the fourth project currently under construction. Together with our projects in Sudbury, Kingston and Stittsville, these four homes comprised 960 new long-term care beds replacing 834 Class C beds. These four projects will be acquired, as I just mentioned, by the joint venture with Axium when that transaction closes.
We are targeting commencement of an additional project under the Time Limited enhanced capital funding supplement, which we anticipate vending into the Axium joint venture later this year. The current funding program, set by the Ontario government will expire at the end of August, and while no extension has been announced, we continue to advance the balance of our redevelopment portfolio in anticipation of future funding programs.
Standard construction costs and applicable regulatory approvals will be pivotal in determining whether and when our other projects might proceed. The need for more long-term care capacity in Ontario and across Canada is driven by demographic trends. We will continue to advance redevelopment of our remaining 16 projects in anticipation of capital funding that may be made available in the future.
With that, I'll turn it over to our CFO, David Bacon, to discuss our first (sic) [second] quarter results in more detail. David?
Thanks, Michael. I'll start by reviewing our consolidated results for the quarter, followed by some financial highlights of our business segments and our liquidity position.
On a year-over-year basis, Q2 consolidated revenue increased 3.7% to $307.5 million. This increase was driven primarily by LTC flow-through funding enhancements, improvements in LTC occupancy, home health care rate increases and a 7.7% increase in average daily volumes and managed services growth. This was partially offset by lower COVID funding of $17.6 million.
Our Q2 NOI decreased by $1.9 million to $28.5 million with an NOI margin of 9.3% compared to 10.2% in the prior year. If we exclude the impact of Q2 2022 workers' compensation rebates of $3.9 million and a recovery of estimated COVID-19 costs of $0.5 million, NOI increased by $1.6 million, reflecting home health care ADV growth and bill rate increases, partially offset by cost increases in our LTC operations.
Adjusted EBITDA declined by $3.3 million. If we exclude the one-time items impacting the 2022 results, our adjusted EBITDA year-over-year is unchanged at $14.8 million, reflecting the improvement in NOI, offset by higher administrative costs.
As a reminder, we report one-time costs relating to the strategic transformation of the company in connection with the Revera and Axium transactions as a separate line item in other expense, which is excluded from our adjusted EBITDA and AFFO. These costs include transaction, legal, regulatory, IT integration and management transition costs.
In Q2, we reported $1.4 million in strategic transformation costs, bringing the total for the first 6 months of the year to $5 million. As Michael mentioned, we will continue to incur these costs through to the end of 2024 as we complete the full integration of Revera's operations and IT platforms.
Our AFFO per basic share was unchanged of $0.11 in Q2. Excluding the one-time items impacting the 2022 results, our AFFO per basic share is up $0.03 from $0.08 in the prior year. Our payout ratio for the second quarter was elevated at 112%. We expect the ratio will fall as LTC costs normalize and the benefit of the Revera transactions closed subsequent to quarter end, come into our results.
Turning to our individual business segments, beginning with long-term care. Revenue increased by 0.4% in Q2, driven by funding enhancements and timing of flow-through spending and improvements in occupancy. NOI declined by $3.8 million to $13.9 million, with an NOI margin of 7.6%.
Excluding the impact of 2022 COVID recoveries and workers' compensation rebates in the prior year, the year-over-year decrease in NOI is $1.1 million, reflecting higher operating costs. partially offset by the funding enhancements.
As Michael mentioned, our long-term care NOI margins are lagging, mainly due to elevated levels of higher cost agency labor that we are focused on reducing as we realign our homes in line with the new direct care hour programs introduced by the provincial governments. High levels of inflation impacting our operating costs remain an issue.
The 2% rate increase in our accommodation funding in Ontario effective April 1, 2023, was below our expectations given the inflationary impacts we have been experiencing in recent years which have contributed to our NOI margin performance.
Turning now to our Home Healthcare segment. Revenue was up $9.6 million or 8.9% and driven by growth in average daily volumes, rate increases and additional funding to support the permanent PSW wage enhancements implemented last year. This was partially offset by reduced COVID funding of $4.2 million.
NOI increased by $1.8 million to $10.1 million with an NOI margin of 8.6% compared to 7.7% last year. Once adjusted for COVID impacts and worker compensation rebates in the prior year quarter, the NOI improvement over the prior year is $2.5 million or an increase of 130 basis points.
The improvement in NOI was driven by higher volumes and rate increases, partially offset by higher operating costs and wages and benefits associated with our recruitment, retention and training programs to address sector-wide labor shortages.
Our Q2 results reflect a rate increase of 3% and as part of the $300 million, the Ontario government announced to support contract rate increases for the home health care workforce and an 8% increase in Alberta. These increases helped to offset our increased operating costs and higher wages and benefits rates that we have been experiencing.
Turning now to Slide 11. We continue to see strong growth in our Managed Service segment comprised of our Extended Care Assist and SGP group purchasing divisions. Q2 revenue increased by 8.1% to $8.8 million, largely due to growth in SGP clients and the mix of assist consulting services in the quarter which led to a $100,000 increase in NOI compared to last year.
Higher costs related to the mix of our assist consulting services and our business development costs contributed to the lower NOI margin. At the end of Q2, SGP supported over 115,000 third-party beds, up 12.9% from a year ago and up 3.3% sequentially.
In connection with the closing of the Revera transactions, which marks a key milestone in our strategic transformation, we are redefining our key performance indicator for the managed service segment to better reflect the range of services we provide to our clients.
We will classify our services into two categories: management contracts and consulting and other services, which include policy subscriptions. Two versions of a management contract are offered to our assist clients: The first is a fully managed service, which provides management oversight over the day-to-day operations of the homes supported by our full back office services, including HR, finance and IT.
The second offering is limited to providing just back office services. We will report the homes and beds under our management contracts as our key performance indicator. And we will also provide insight into the number of homes for which we provide consulting and other services.
During second quarter and subsequent to quarter end, certain of Extendicare Assist clients moved or notified the company of their intent to move to self-management or close their homes. We also entered into full service management contracts with two additional homes representing 340 new beds.
With the impact of these changes and the closing of the Revera transactions, Extended Care Assist has management contracts with 73 homes comprising 9,962 beds and provides a further 53 homes with consulting and other services. We will also see an increase in third-party beds served by SGP to 122,785. These numbers reflect the addition of the Revera Homes, beds within the joint venture with Axium and the net impact of the other customer changes. We anticipate that the financial performance in our Managed Services segment will continue to align with these revised KPIs.
Turning to Slide 12 and our financial position. Extendicare remained well-positioned with strong liquidity. At the end of June, we had cash and cash equivalents of $89 million and access to a further $80 million in undrawn credit facilities. In addition, we had $100 million in undrawn construction financing available to fund the balance of the costs associated with our ongoing redevelopment projects.
Our maturity profile remains strong with only modest debt maturities coming due prior to 2025. The aggregate proceeds paid on the Revera transaction subsequent to the quarter, were $69.7 million, which included $32.6 million in cash used net of holdbacks and the assumption of our 15% share of debt within the joint venture of $37.1 million.
We anticipate receiving the proceeds from closing of the Axium transaction in Q3 as well, which would replenish our strong cash position. In addition, under the Axium transaction, the joint venture will assume the long-term care redevelopment construction financing facilities, of which $56.9 million was drawn at the end of Q2.
Lastly, under our NCIB that expired in June, we purchased 627,500 common shares for cancellation this quarter at a cost of $4.1 million representing a weighted average price of $6.53. Since our NCIB launched last year, we've returned $39.1 million to shareholders with the purchase and cancellation of approximately 5.6 million shares.
On June 30, 2023, we did renew our NCIB for cancellation of up to 7.3 million common shares through to the end of Q2 of 2024. Any decisions regarding purchases continue to be based on market conditions, share price and the outlook for our capital needs.
With that, I'll pass the call back to Michael for his closing remarks.
Thanks, David. The renewed sense of optimism that I spoke about last quarter continues to grow. We are seeing improvements in our operations and our growing capacity to meet the high demand for services notably in home health care is encouraging. Although cost pressures in long-term care have been challenging, we expect cost to receive more quickly now as we return to normal operations.
With the closing of our Revera transactions and the upcoming completion of the Axium transaction, we are seeing our strategy materialize in tangible ways. This is a journey we announced over a year ago, and we are pleased to be advancing in the areas where we can help most to meet the needs of an aging population.
While the plan to integrate the Revera homes will take approximately a year, we will see the benefit of the additional events and services start to come into our results in the next quarter. We look forward to leveraging our expanded scale and expertise to advance delivery of the high-quality care that Canada seniors deserve.
Finally, it is important to note that we would not be able to meet the growing demands for services we provide without the dedicated care professionals and team members across our organization. I thank them for their steadfast commitment to keep our residents and clients safe and well cared for. They are at the heart of our mission to help people live better.
With that, we'd be happy to take any questions that you might have. Operator?
Thank you. [Operator Instructions] The first question comes from Jonathan Kelcher with TD Cohen. Please go ahead.
Thanks. Good morning. First -- and congrats on getting the Axium deal across line [ph]. First question is on that. I guess from your comments, can we take it that basically everything related to that joint venture is going to end up in managed services?
Yes. On the Revera transaction, the 56 homes that we are managing, there's 25 in the joint venture, and then the balance is a direct management contract with Revera. The fees associated with all 56 of those homes and 7,000 beds will go into our Managed Services segment.
And on this part of the assets that you own, is that also in there? Or is that still in long-term care?
Yes. That -- we plan on reporting that 15% segment as sort of part of our corporate segment, like the actual 15% pick up -- equity accounted pickup of that interest will map into the corporate segment in our segmented, and then we'll pick up our pro rata share of the AFFO of the joint venture in our calculation of our consolidated AFFO. So you'll see that 15% interest really come through more as a kind of a corporate contribution versus getting mapped into LTC.
Okay. So the LTC stuff will this be your 100% owned?
Correct. That's the intent, yes.
Okay. And then over time, as this JV grows and that looks like a big part of your business is growing, like how much -- how big can the managed service part of your business get?
Well, I think first thing I'd say is we have the immediate opportunity there is the redevelopment agenda that both us and Revera have as we indicated. We do have a right to anything that Revera redevelops of their 30 C bed homes in Ontario, and we have, as you know, our own 20. So right away that's the most immediate opportunity as they get redeveloped, we will do those through this new structure. So it would allow us to earn a management fee off of those potentially as many as 50 additional projects through the joint venture structures.
I think the other opportunity there is we are focused and have been most exclusively on Ontario, given the capital program, but there is redevelopment needed in the West in our portfolio, and there could also be net new acquisition opportunities using the capital structure with Axium to potentially by other projects as well. So the immediate focus or opportunity certainly is those 50-home portfolio of redevelopment projects we have and may have with the most immediate focus over the next, say, 5 to 7 years as that redevelopment takes place.
Okay. And then I guess, turning to long-term care the margin was 7.8% this quarter. If I look back to Q2 2019, and assuming that was a clean quarter, I think you were 9%. Is that sort of a good way to think about margins going forward, at least until we start to get some improvements in government funding sort of 100, 120 bps below pre-pandemic device levels?
Yes. I think there's -- maybe offer up a few thoughts on that. When we think about percentages, I think it's important to remember that the increase in the flow-through funding in Ontario with the direct four hours of Care Funding, making permanent $3 -[indiscernible]. So you put all that into the blender when we get to the full kind of 4 hours of care and it's 120, 130 basis point impact from a percentage basis. So I think we think more about returning to NOI dollars versus percentage because that is quite a significant impact on the percentage.
So that -- you're pre-pandemic, I think we had margins, I don't know the particular quarter you referenced to '19. But generally, our margins were in the 11.5% to 12% range. So if you adjust out the 120, 130 [ph] basis point of the flow-through you might be thinking of things in the sort of 10.5% range to 11% range is sort of a target where we'd like to get to. But that's sort of how we think about it at the moment, but we do have these OA pressures that we've talked about and this compression with the inflation that is definitely impacting us, but that needs to be part of how we think about the rates coming back into equilibrium to help make up for some of that.
Okay. And then just lastly, in the -- in your -- on the ParaMed business, it is really good to see the increase in average daily volumes. But on the slide, you talked about $14.2 million in increases funding increases on a trailing 12-month basis. What would be the equivalent increases in wages and benefits that's attempting to cover?
Yes, it's a good question. I mean there's quite a bit. I mean the 3% increase was welcome. I'd say, in that business, we've got probably 60% of our workforce is unionized, about 40% is not. So a lot -- quite a -- I'd say, a large portion of that is baked into rate increases anywhere from 2% up to 3% depending on the union, and then many markets are nonunion folks, we keep in lockstep. So a large part of that 3% is -- has been committed to the underlying workforce and the increases. So that will have some modest impact on our margins, but in a lot of ways, the 3% was much needed to recover cost increases we've already been incurring.
For sure. Do you see that business hitting double-digit margins in the next couple of years?
That would -- I mean, I think we've spoken in the past about longer term, not careful not to say when we think that would happen. But definitely, it is a target to be into double digits. We think -- we do think that the foundation we've laid and we've seen now three quarters of recovery. We are starting to see some improvement in our staffing capacity. So we do think that is an opportunity and something to aspire to, whether it's 2 years, 3 years, 1 year, it's difficult to say, but that is the trajectory we want the business to be on.
Okay. Thanks. I will turn it back.
The next question comes from Tal Woolley with National Bank Financial. Please go ahead.
Hi. Good afternoon.
Hi.
I just maybe want to ask Jonathan's question maybe a different way. Going back to pre-COVID, you're running NOI from quarterly NOI from your LTC business is around $20 million a quarter, you're at roughly $14 million now. Without anything extraordinary happening with respect to funding, is that -- can you get that number to something like $17 million within the next year? Or is it -- do you think you can get it all the way back to $20 million a quarter. I'm just trying to get a sense of what you think can happen without material changes in the funding model.
We think that we can improve our margins in long-term care with the current funding. We are seeing that our homes are returning to more normal operations on kind of differing time lines. Some of them have already got there. Others are taking more time to get there. So we are working with them to do that. So we do think that we can achieve some margin improvement just on our own steam, and then we are continuing to work with the rest of the sector, work with government to look at the balance between the different funding envelopes to try to more fully address the inflationary pressures that we've been subject to over the last few years. So we are hopeful that we'll see some movement on that front as well. So we are optimistic that we improve margins. How far back to historic levels will get remains to be seen. But we definitely see opportunity, and we are certainly pursuing it as we speak.
Okay. I'm just also wondering to like given the sort of repositioning of the company here, and everything finally closing, obviously, we've been needling away like trying to figure out what the new "Extendicare" looks like from a profitability perspective. But has there been any conversation between either management or the Board about providing maybe some longer term targets that are published that we can sort of get an idea of what kind of financial return you are heading towards? Because I think one of the challenges for us on the outside is there's obviously the timing question on a lot of these deals, but also I think your taxability is probably going to shift around too as you shift to more non-real estate driven activities. I just think providing that kind of -- without having to get into specific guidance for a year, but a target of like by this time, we think we can deliver this kind of earnings because I think people would just like to get more comfort with dividend level, all that stuff. And I think doing something like that would be helpful.
Yes, I think we would love to be able to do that too. But I think we are still having some considerable challenges predicting how the sector is going to play out because, obviously, we are not only being buffeted by sector specific issues but broader issues in terms of the labor market, in terms of interest rates and just in terms of even demographic factors that are affecting those things. So we've been trying to give some indication of where we have some visibility in terms of how many projects we think we can get under construction, for instance. But even that is proving challenging from quarter-to-quarter. We are not even clear what the capital funding programs are going to look like after the end of August.
So I think it's very difficult for us to do that on any kind of larger kind of time line. David talked about our efforts to add more clarity to our KPIs, particularly in our Managed Services segment, where we are targeting a lot of our growth as we look at the joint venture structure with Axium. And we will do our best to give you some visibility. But at this point, anything that kind of goes beyond what we've done so far would really be not much more than a guess.
Okay. All right. That's helpful. Thanks, gentlemen.
[Operator Instructions] Since there are no other questions, 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. This presentation is available on our website as are the call-in numbers for an archived recording. Thank you again for joining us. Please don't hesitate to give us a call if you have any questions. Have a good weekend.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.