Extendicare Inc
TSX:EXE
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Extendicare Inc
Earnings Call Analysis
Summary
Q2-2024
In the second quarter, the company saw substantial increases in revenue and margins, reporting a 13.3% rise in consolidated revenue to $348.5 million. Notably, net operating income (NOI) surged to $24.3 million, with margins improving dramatically from 9.3% to 15.2% year-over-year. Key drivers included increased technology investments, a strategic shift to managed services, and favorable government funding. The Long-Term Care segment saw a 60 basis point occupancy rise to 97.8%, while Home Health Care experienced a 10.8% increase in average daily volumes. The Managed Services segment also doubled its revenue and NOI, backed by significant transactions and organic growth.
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Thank you for standing by. This is the conference operator. Welcome to Extendicare Inc. Second 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 Second Quarter 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 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 the call. As well, replay numbers and passcodes have been provided in our press release to access an archived recording of the call until August 30.
Before we get started, please be reminded that today's call may include forward-looking statements and 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 measures -- sorry, 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 filings.
With that, I'll turn the call over to Michael.
Thank you, Jillian, and good morning. Yesterday, we reported very strong second quarter results, highlighting the growth and earnings potential of all 3 of our operating segments, each one contributed to significant growth in net operating income and margins. Our financial performance this quarter benefited from the confluence of 4 actors that contribute to the potential of our operating platform. First, our investments in technology to create a scalable back office to support volume growth and margin expansion. Second, our transformative shift to a less capital-intensive, higher margin business model focused on managed services through our JV with Axium. Third is a strong demand for our services as we emerge from the pandemic reinforced by underlying demographic trends. And finally, government funding increases that address cumulative cost inflation to restore home care and long-term care to their historical margin profiles.
Consequently, revenue and operating margins were up substantially across the board. In long-term care, Q2 occupancy levels increased 60 basis points to 97.8%, marking the return to the historical levels required for full funding and underscoring the characteristic stability of this business. You can also see the impact of the catch-up long-term care rate increases in Ontario coming through.
In home health care, our strong volume growth contributed to outpace demographic trends with average daily volumes increasing 10.8% from the prior year. Rate increases and a highly scalable back office supported a return to double-digit margins. Additionally, Easter landed in the first quarter in 2024, which reduced the cost of one paid holiday this quarter compared to Q2 last year.
As our operations normalize following the pandemic, we are seeing the return of seasonal patterns. Historically, Q2 volumes tend to be strong followed by seasonal softness in the summer months from vacations and closure of school-based home care programs.
In our Managed Services segment, we also saw strong results supported by the Revera and Axium transactions which closed last year. Extendicare Assist beds increased by 64% from the prior year period, and the number of third-party and joint venture beds served by SGP increased by 22.1%, driven by both organic growth and the strategic transactions. As a result, both managed services revenue and NOI more than doubled in Q2 from the same period last year.
NOI continues to be weighted toward our services segments, which with managed services and home health care comprising 56% of consolidated NOI in the quarter. We expect the proportion of NOI coming from these segments to continue to increase as we execute on our strategy. Note also that 2024 rate increases for long-term care in the Western provinces and home health care in Ontario have yet to be announced. These would be effective retroactively to April 1, 2024, further offsetting cost inflation and enabling continued service expansion.
Turning to Slide 4. Each of our growth pillars contributes to improved results. Our services segments are growing organically at significant cash flow with minimal capital needs. On the redevelopment front, we have 5 homes under construction with 3 more being ready to start construction later this year. We also improved the balance sheet in Q2, adding $25.4 million in liquidity from the sale of our 256-bed Orleans project into the Axium JV and as well as completing a sale of the legacy C bed home in Sudbury following the opening of the new 256-bed countryside home in the joint venture at the end of Q1.
Although our payout ratio in the quarter was 43%, our trailing 12-month payout ratio was 63% after removing onetime funding received over the past year. The adjusted trailing 12-month ratio is a better indication of the underlying cash generation potential of the business. Coupled with our strong liquidity and improved credit metrics, we are well positioned to execute on our growth agenda, including our redevelopment program and partnership with Axium.
Slide 5 provides more detail on our redevelopment progress. We are focused on opening our 192-bed Kingston Home and 256-bed Stittsville Home both held in the JV. Labor shortages experienced by the general contractors have delayed these openings into Q4. We anticipate the sale of the vacated Kingston C bed home will close shortly thereafter for estimated proceeds of $3.8 million.
Our partnership with Axium allows us to recycle the capital generated from the sale of legacy C Class homes no longer in service to fund our 15% interest in new redevelopment projects that we pursue through the joint venture. During construction of the new homes in the JV, our Managed Services segment earns development fees, followed by management fees to operate the homes once they open. We currently have 5 homes under construction in Ontario in the joint ventures with Axium totaling 1,280 new beds, which will replace 1,121 Class C beds that will be decommissioned.
In 2024, we're targeting to begin construction on 3 new projects comprised of 576 beds, replacing 382 C beds. These projects are in advanced planning stages and will proceed provided they meet the requisite financial conditions, including confirmation of final construction costs, interest rates and applicable regulatory approvals. Work also continues to advance an additional 12 redevelopment projects that are in our planning pipeline for future years.
At this point, I will 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. Our Q2 results were impacted by favorable out-of-period items, and we have summarized these in the appendix to the presentation. Given these impacts, when I speak to the year-over-year variances, I'll include reference in some metrics to our results, excluding the impact of these out-of-period items.
On a reported basis, our consolidated Q2 revenue increased by 13.3% to $348.5 million. This was driven primarily by LTC funding increases and improved occupancy levels, growth in home health care average daily volumes and billing rates and growth in our managed services. Our Q2 NOI increased by $24.3 million with a margin of 15.2% compared to a margin of 9.3% in the prior year.
Excluding out-of-period LTC funding of $4.1 million recognized in the quarter, NOI improved by $20.2 million, reflecting growth across all our segments, offset partially by higher operating costs. Our reported adjusted EBITDA for Q2 increased by $23.8 million. Excluding the impact of out-of-period LTC funding, adjusted EBITDA increased by $19.7 million, reflecting the improvement in adjusted NOI, partially offset by modestly higher administrative costs.
Our AFFO per basic share in Q2 was $0.27 compared with $0.11 in the same period last year. And on an adjusted basis, AFFO increased year-over-year by $0.13 to $0.24 per share in Q2.
Turning to our individual segments, starting with long-term care. Excluding the impact of out-of-period funding of $4.1 million recognized in the quarter and COVID funding received in Q2 of 2023, our revenue increased by $11.3 million driven by funding increases and improved occupancy. NOI, excluding the out-of-period funding recognized in the quarter, increased by $7.6 million, driven by increases in revenue as noted, partially offset by higher operating costs. The corresponding NOI margins increased to 11.3% in the quarter from 7.8% last year. Our long-term care results were strong this quarter even without the benefit of the onetime funding. The 11.5% increase in Ontario other accommodation funding has largely restored our NOI. And together with the additional Ontario flow-through funding has helped alleviate the cumulative impact of higher operating costs. We've also made considerable progress realigning our post-pandemic cost structure by reducing our dependency on agency staff.
Our long-term care operations saw lower year-over-year utility and maintenance costs this quarter and benefited from the timing of the Easter holiday. As a result, our year-to-date results provide a more indicative view of our NOI margins coming out of Q2. In addition, LTC funding increases for both Alberta and Manitoba for April 1, have yet to be announced. These pending funding increases and continued focus on operating cost efficiencies, primarily in our Western Canadian LTC operations will provide further opportunities to improve our LTC segment NOI.
Turning now to our home health care segment. Revenue in the second quarter increased by $20 million or 17.2%, driven by the 10.8% year-over-year growth in our volumes, supported by billing rate increases. NOI increased by $7.1 million to $17.1 million, with an NOI margin of 12.6%, an increase of 400 basis points over the same quarter last year. The strong growth in NOI was driven by higher volumes and rate increases. And as Michael mentioned, [ definite ] from the impact of one less statutory holiday due to the timing of Easter in 2024, which reduced holiday pay this quarter by approximately $1.4 million.
ParaMed's volume growth continues to outpace demographic trends. In recent years, the pent-up demand for services and improvements in our recruiting and retention programs have driven our volume recovery and lessen the seasonality that has historically characterized our Home Care segment, including effectively muting the seasonal softness typically experienced in the summer months. But as our capacity comes in line with demand, we do expect the historical season patterns to return.
Turning finally to our Managed Services segment. Revenue and NOI more than doubled this quarter as the business continues to reflect the addition of managed homes and new SGP clients from last year's Revera and Axium transactions alongside organic growth in SGP. Our revenue increased to $18 million and our NOI to $10.1 million. This quarter's NOI margin was 56.1%, an increase of 460 basis points over the same period last year. Our year-to-date NOI margin is 53.5%, which is in line with the expectations for this segment of between 50% and 55%.
Finally, turning to our financial position. We ended the quarter with a strong liquidity position with cash of $136.4 million and access to a further $72 million in our credit facilities. Our liquidity position was bolstered during the quarter with the cash proceeds of approximately $25.4 million from our redevelopment related transactions. We are well positioned, thanks in part to our strong operating results in the quarter, and our solid debt metrics and liquidity. The added flexibility from our strategic transactions have us well positioned as we continue to assess our options related to the convertible debenture that matures in April of 2025. And we expect to be able to provide an update on this before the end of the year.
In June '20 -- in June of this year, the company renewed its normal course issuer bid to purchase up to 7.1 million shares for cancellation beginning July 2, 2024 and will be in place until July 1, 2025. Decisions regarding the quantity and timing of purchases continue to be based on market conditions and our outlook for capital.
With that, I'll pass the call back to Michael for his closing remarks.
Thanks, David. Our second quarter results demonstrate the growth and earnings potential of our business. We can deliver this given our strategic focus, strong financial foundation and commitment to operational excellence. Our strong operating results show we can grow to meet the needs of seniors while driving shareholder value. Over the past several years, we have invested in our technology platform, formed a joint venture with an infrastructure partner to drive long-term care redevelopment, invested in a formidable recruiting and retraining operation and built a sales team to sell our managed services across the country. These strategic pillars position us well in a growing fragmented market underpinned by strong demographic trends. Our results are a testament to the continued efforts of the leadership team and the dedication of our valued team members. As always, I am deeply grateful for their ongoing commitment to our values, and for the compassionate care they deliver each and every day.
With that, we're very happy to take any questions that you might have.
[Operator Instructions] The first question comes from Jonathan Kelcher with TD Cowen.
First question, just I see you applied for some extensions for the Class C -- some of the Class C properties. Do you anticipate any issues in getting those? Is that fairly normal for us?
Yes. We don't anticipate any issues there, Jonathan. We haven't received those license extensions yet, to our knowledge, nobody has in the sector, but we don't anticipate any issues there.
Okay. And then the Sudbury asset sale, who bought that? Or what was the buy profile for that property?
Yes. Jonathan, that was bought by a local investor sort of philanthropist in the area. Our understanding is that they intend to repurpose the building for student housing in the Sudbury market. So the building will -- the old building will stay and be refurbished and repurposed as student housing is what we understand the intent is.
Okay. And then just switching to operations on the long-term care side. It looks like you're back to [ holding all ] that stuff. What sort of margins do you think that business can run on, on a stabilized basis?
Yes. I think, Jonathan, on that, a couple of thoughts and you heard in our comments, and I think a couple of things. The year-to-date results, I think, in that segment are the starting point to answer that question. So our margins are running at 9.7% -- sorry, 9.6% when you normalize year-to-date. I want to remind everybody that the effect that's built up over the last few years and now fully in effect with now having moved to 4 hours of care that additional incremental flow-through revenue probably equates to between 130, 140 basis points impact to our margins from a percentage point of view. .
So I think just keep that in mind, our long -- our pre-COVID levels, we would run 11.5% to 12%, but I think you have to think of those now more like in the 10.5% to 11% range with the effect of that flow through. So I think we're at 9.6% to date. Our absolute NOI year-to-date is about $37 million. So if you annualize that, we're sort of $74 million, $75 million, which is very close to where we were in 2019 on an absolute dollar basis. So we still think we have room to improve in terms of -- there's still some work we're doing in Western Canada and LTC. We made some great strides in the last couple of quarters on that.
We don't have our rate increases yet in the West for April 1, those hopefully come shortly. And so those will help as well. So I think you put all that into the blender and you're looking at our margin should be returning back, I'd say, to the 10.5% to 11% range, which would just -- would be -- take us back to historical norms. And then hopefully, we fall back into a pattern where rate increases are keeping better pace with inflation as we go ahead. So we can get back to that steady reliability that we were used to before. We're 2%, 2.5% a year growth in NOI, keeping pace with inflation.
Okay. That's very helpful. And then on the home health care side, I think, Michael, you talked a little bit about seasonality returning to that. You guys have done, I guess, year-to-date, just over 3% growth in each of Q1 and Q2. What -- how should we think about that for the back half of the year? And secondly, do you think margins in that business segment continue to edge up back to maybe not historical levels, but close to it?
Yes. I think on the volume front, we've been seeing for the last couple of years now, 10% year-over-year, 11% year-over-year growth. That's definitely higher than demographic trends, and that's because we're catching up to the care gap that opened up during the pandemic. So there's still a bit of a gap there, and we're still working to close that. So I think we still got a couple of quarters where our year-over-year growth is going to be in that same zone. But then we expect that, that growth rate will ease off approaching more of the just underlying demographics. So call it, 5% -- 4%, 5%, something in that neighborhood. So we're not -- we don't have absolute clarity as to when that will happen as to when our growth pace will ease off. So we'll be watching for that. And at that point, we expect it to settle back.
As far as margins are concerned, I think Q2 traditionally is our best quarter from a margin perspective just because of volumes and costs and when rate increases kick in and that sort of thing. So -- but that said, I think that -- we're now squarely into double-digit margins in Home Care, and we'll stay there. I think David's comment about the year-to-date numbers being a better indication of our kind of underlying run rate in the sector is probably where I would suggest you look. And I do think that we still have room for gradual margin improvement going into future years. And of course, we don't have the rate increase for the province of Ontario yet for 2024. So we're expecting that any time. So that isn't factored into the results yet either.
Okay. Do you think that rate increase will be a huge catch-up like LTC? Or will it be more -- are you expecting more inflation type?
No, I think it will be more in line with our labor costs. It will be more in line with -- it'll be more than CPI, but it will be in line with our labor costs, I think. So I think that this quarter is reflecting the catch-up that really came in -- late in Q4, and we reported in Q1. So I think the catch-up is there now.
[Operator Instructions] The next question comes from Pammi Bir with RBC Capital Markets.
Just wanted to clarify some of the commentary on long-term care. There was some onetime income in there, I guess, from Alberta and Manitoba. But -- was there any sort of timing difference in terms of the spending there in the Q2 figure?
Yes. I think, Pammi, in Q2, a couple of things. I mean we called out the staff holiday which does have a bit of an impact between Q1 and Q2, looking sequentially as well as year-over-year. We did make some good improvements on costs, reducing agency costs quite significantly in the quarter year-over-year and sequentially. There is a bit of movement between Q1 and Q2 around the funding envelopes mostly to do with the statutory holiday. So the $900,000 impact that we call out is more of the -- think of that as OA type impact, as largely historically the timing of staff days as it relates to the flow-through envelopes is generally not seen. This is the first time since 2019 where Easter changed. So there is a little bit of movement, just a bit over $1 million between Q1 and Q2 between the envelopes just because the timing of Easter hitting in Q1 would have pushed a handful of homes potentially into an overspend position. When you get in Q2 and the rate increases kick in for April, there's an ability to absorb some of that. So there is a little bit of movement between Q1, Q2, that's hasn't happened for 5 years since Easter was last flipped between Q1 and Q2. But a lot of our improvement is agency reduction and just general ops improvement in terms of other -- focused on non-wage costs as well around supplies and R&M and utilities. Some of that is timing and some of that is just seasonality and utilities.
That's helpful. Just maybe coming back to the agency commentary. How much were you able to reduce the agency cost? Like was there much change between the quarters? Or is it -- or was it just more on a year-over-year basis, that's where the biggest impact was noticed?
Yes. It's both actually. I think we reduced our agency spend just about $1.5 million between Q1 and Q2 and closer to $3 million on a year-over-year basis. So it's been a very -- it's been a big focus in the West, mostly in the West. I think in Ontario, we're in good shape on that. The West were has been -- had some holdouts in certain regions in the West where it's been tougher to displace the agency, but we've been putting a lot of recruiting programs in place to target those homes in those areas that -- where the agencies have taken a bit of a stronghold during COVID.
Okay. Got it. And then just coming back to, David, your comments on, I think you said -- did you say $74 million to $75 million sort of the annualized long-term care, NOI is sort of a reasonable starting point. And then just coming back to some growth that you anticipate in the Western Canadian provinces as well?
Yes. I mean that number is -- if you take our first half of the year, Pammi, normalized for the sort of out of periods, we're running at about $37 million of absolute NOI. So if you use that as a starting point for annualization takes you to the $74 million, $75 million. And that's where we're still waiting for our rate increases in Alberta and Manitoba that should help contribute to growth from there as well as there still is some focus. We still have some work that we're doing in the West on some of the cost side of things. So there's still some progress we think we can make still in the next couple of quarters in the West on spending, mostly around the agency and some of the key markets. So there's some room to go there that would help add to the performance.
This concludes the question-and-answer session. I would like to turn the conference back over to Jillian Fountain for any closing remarks. Please go ahead.
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, and please don't hesitate to contact Investor Relations if you have any questions.
This brings to close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.