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. Third Quarter 2022 Analyst Conference Call. [Operator Instructions], and 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 Third Quarter 2022 Results Conference Call. With me today are Extendicare's President and CEO, Michael Guerriere; and our Senior Vice President and CFO, David Bacon.
Our Q3 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 get themselves. A replay of the call will be available later this afternoon until November 25. The replay numbers and passcodes have been provided in our press release and an archive 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. Before we begin on this November 11, it is important that we take a moment to acknowledge and remember those who have served our country and had the courage to defend our shared ideals and values in the face of immense personal risk. In our capacity as a senior care provider, it has been our profound privilege to know and serve many veterans who sacrifice much to defend our freedom and way of life. Today, we honor those heroes for their service to our country and remind ourselves that we owe them our gratitude and respect.
Now let's turn to our results for the quarter. Our sector continues to be impacted by multiple challenges. COVID-19 remains an ever-present concern in our homes, even as our society moves on from pandemic-related restrictions. High levels of COVID transmission in the community continue to result in outbreaks in our homes. These outbreaks drive higher costs related to infection control and slow the pace of our occupancy recovery. Also increased sick leave to infection or isolation protocols exacerbates sector-wide staffing challenges. Fortunately, widespread vaccination has dramatically reduced the incidence of severe illness. The introduction of bivalent COVID vaccines in September offers a new tool to protect our residents and uptake of boosters continues to be robust. Throughout the quarter, most of our homes experienced an outbreak. As of yesterday, 12 of our 53 long-term care homes were in outbreak. The shortage of caregivers continues to create challenges for the whole health system.
In home healthcare, record low unemployment and labor shortages are making it difficult to grow average daily volume despite the continued strong demand for our services. Staff shortages are also driving increased costs from higher wages and benefits over time and travel costs. Increased spending on recruitment, retention and training is also adding to pressure on our home health care NOI margins. We continue to invest in educating new caregivers through college partnerships and in-house training programs. In addition, various provincial and federal government programs are providing funding to increase staff capacity.
However, it will take time for the impact of these programs to be felt. We will continue to incur elevated COVID-related costs in our ongoing efforts to protect our residents, patients, clients and staff until the threat of the pandemic has abated. We have received funding to cover 90% of these costs, leaving the cumulative unfunded COVID costs from continuing operations at $22.9 million. As of the end of Q3, the Ontario Ministry of Long-Term Care had fully allocated all the prevention and containment funding it as announced today. While additional funding has not been announced as yet, we expect provincial support for COVID costs to continue as long as outbreaks persists across the LTC sector. Alberta and Manitoba have already indicated their intention to continue to provide pandemic funding support for the foreseeable future. While we are grateful for the support we have received, we will likely continue to experience volatility in our financial and operating results until pandemic impacts received and the labor market returned to a more balanced state.
Turning to Slide 4. In October, we completed the transition of ownership and operations of our 5 Saskatchewan long-term care homes to the Saskatchewan Health Authority. The aggregate purchase price of $13.1 million will result in a gain on sale, net of taxes and closing costs of approximately $4.9 million in Q4. Work continues to prepare for the close of our previously announced transactions with Revera and Axium. These transactions will enable us to transition our long-term care operations to a more capital-efficient platform for growth. Regulatory approvals in Ontario and Manitoba are still in progress. In the meantime, we are working with Revera and Axium on a comprehensive integration plan to ensure a smooth and expedient transition following approval.
We have incurred approximately $5.2 million year-to-date in strategic transformation costs related to these activities. The aggregate consideration to be paid on closing of these transactions remains an estimated $70 million. At the same time, we continue to return capital to shareholders by purchasing shares under the NCIB that we initiated in June following the completion of the sale of our Retirement Living segment.
As of November 9, we had purchased for cancellation approximately 3.6 million common shares at a cost of $25.5 million and representing a weighted average price per share of $7.08. Moving to Slide 5. We continue to make progress on our 20 long-term care redevelopment projects, which represent 4,248 new or replacement beds. 3 of these projects are currently under construction and are progressing toward opening between the third quarter of '23 and the first quarter of '24. Labor shortages and supply chain disruptions did delay our Kingston project into Q4 of '23. And rising construction costs and interest rates have made it challenging to start construction on any additional projects. We remain fully committed to redeveloping our older C-bed homes. We are actively engaged with industry partners in the Ontario government to enhance the government's capital funding program to address construction inflation to make these projects economically feasible. We are working to have up to 6 more projects ready to break ground before the end of 2023 if business conditions are favorable.
Now we'll turn to a few operational highlights on Slide 6. Despite the prevalence of COVID in the community and outbreaks in our homes, long-term care average occupancy improved 90 basis points in the quarter. While navigating the challenges of the pandemic and the tight labor market, we are also faced with inflationary pressures that are significantly impacting our operating costs. Funding rate increases have lagged inflation in our long-term care segment, negatively impacting our financial performance with LTC NOI margins down 230 basis points from the prior year.
In our Home Health Care segment, an extremely tight labor market, combined with ongoing pandemic-related staff up centers and seasonal impacts, resulted in lower average daily volumes of 0.5% on a sequential basis. In our SGP customer base, we continue to see strong growth during the quarter, up 4.7% from Q2 and up 21% year-over-year. The pandemic continued to cause volatility in our results with ongoing mismatches between costs and funding. Pandemic-related spending increased during the quarter to $22.5 million, up $400,000 from Q2 as outbreaks continue in our long-term care homes throughout the quarter. Our COVID costs were largely funded and included $1.1 million for the prior year, resulting in net unfunded cost of $500,000 in the quarter.
With that, I'll turn it over to our CFO, David Bacon, who will comment on our consolidated and segmented financial results for the third quarter. David?
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 a reminder, our retirement living communities that were disposed of in May and the Saskatchewan long-term care operations sold after quarter end have been classified as discontinued in our financial results. This quarter, we reported $3.6 million in costs related to the strategic transformation of the company in connection with the Revera and Axium transactions, bringing the total cost to date to $5.2 million. We have reported these costs as a separate line item in other expense, and we'll continue to track these costs on a go-forward basis, which will be excluded from AFFO and EBITDA.
Turning now to Slide 8 and our consolidated results. We continue to receive COVID funding support under various provincial programs. Our net unfunded COVID costs impacted our consolidated adjusted EBITDA from continuing operations by $500,000 this quarter. On a year-over-year basis, our consolidated revenue increased 8.7% or $24.6 million to $38.9 million. This increase was driven primarily by long-term care funding enhancements, including funding for additional hours of care, timing of spending in the flow-through care envelopes, home health care billing rate increases and growth in other operations. This was partially offset by lower COVID funding support of $9 million and a 1.2% decline in home healthcare average daily volumes.
NOI decreased by 18.9% or $5.5 million to $23.5 million with a margin of 7.6% compared to 10.2% in the prior year quarter, driven by higher operating costs across our segments, lower home health care daily volumes and a net increase in unfunded COVID-19 costs of $1.3 million. Our consolidated adjusted EBITDA decreased 40% or $6.8 million to $10 million due to the lower NOI and increased administrative costs of $1.3 million. AFFO per share was $0.02 in Q3, down from $0.11 per share in the prior year period, reflecting the decline in earnings, including the loss of approximately $0.02 per share from the disposed Retirement Living segment and higher maintenance CapEx.
Turning to our individual business segments on Slide 9. Long-term care operations saw revenue increase by $16.6 million or 9.5% in Q3, driven by funding enhancements and timing of flow-through spending, including $19.5 million in Ontario flow-through funding. This was partially offset by lower COVID expense funding of $4.6 million. NOI decreased by $3 million in Q3 to $13.9 million and represented 7.2% of revenue. Excluding a reduction in COVID recoveries of $1.1 million, NOI declined by $1.9 million, reflecting the significant inflationary impacts on operating costs, including labor, utilities, supplies and insurance. These inflationary impacts have not been offset by sufficient increases in funding, including the lack of an OA rate increase in Ontario long-term care in April of this year. Our NOI margins adjusted to exclude the impact of COVID were 7.8% compared to 10.1% in Q3 of 2021.
In addition to the inflationary pressures, margin percentages are down approximately 100 basis points from the impact of the Ontario flow-through funding increases, including the phase-in of the 4 hours of care and the now permanent $3 per hour wage increase for PSWs. The persistence of outbreaks is hampering the pace of our occupancy recovery in long-term care. With the removal of occupancy protection Ontario earlier this year, we are required to achieve 97% occupancy for the 11 months ending December 31, 2022, excluding closed more style beds no longer in use and isolation pets. On this basis, our average adjusted occupancy for the 8 months ended September 30 was 96.5%, up 50 basis points for the 5 months ended June 30.
We continue to track a handful of Ontario long-term care homes that may not fully recover to the required 97% and have recorded an $800,000 reduction in NOI for the shortfall in our year-to-date results. In August, the Ontario government confirmed its plans to permanently close third and fourth-word-style beds and announced its intention to phase out funding over a 2-year period starting in 2023. We have 185 word-style beds in Ontario, of which 76 will be reopened when they are replaced by single rooms in our new Kingston and Sudbury projects currently under construction. We estimate the potential NOI impact in 2023 of the proposed morale funding reduction to be approximately $1.1 million.
Turning to Slide 10. Revenue in our home health care segment grew $5.7 million or 5.6% in Q3, driven by billing rate increases and additional funding to support the government's permanent wage increase for PSWs. The increase in revenue was partially offset by lower COVID-19 pandemic funding of $4.4 million and a decline in our average daily volumes of 1.2% from the prior-year quarter. ParaMed's NOI decreased by $3.5 million to $5.2 million, with an NOI margin of 4.8% compared to an 8.5% margin in the same period last year.
The decline in NOI reflects billing rate increases offset by higher wages and benefits, travel and technology costs, including costs associated with the elevated levels of recruitment, retention and trading costs to address our stock capacity challenges. On a sequential basis, excluding the impact of the net COVID cost and the workers' compensation rebate received last quarter, our NOI margin was down 160 basis points, reflecting these higher operating costs from increased overtime and travel, including a temporary mileage premium provided to staff to address high fuel costs and higher back office costs to address the staffing challenges and the rise of COVID-related staff absenteeism during the quarter.
Turning now to Slide 11. The demand for our assist services and SGP purchasing service continues to be strong. SGP now supports 107,000 third-party beds as of the end of Q3, up 21% from a year ago and up 4.7% sequentially. The Q3 revenue increased by $2.3 million or 34.6% to $8.8 million from Q3 2021, largely due to growth in our SGP clients and the timing and mix of our Assist services, which resulted in a $1 million increase in our NOI to $4.5 million.
Finally, turning to Slide 12. Extendicare remains well positioned with strong liquidity with cash and cash equivalents increasing to $175 million and access to a further $77 million in undrawn demand credit facilities at the end of the quarter. In addition, the company has undrawn construction financing available in the aggregate of $142 million for our ongoing redevelopment construction projects. Our maturity profile remains strong with only modest debt maturities coming due over the next 2 years and a debt-to-gross book value of 35.2%.
Our liquidity position provides us with flexibility to allocate capital strategically, whether in respect of our long-term care redevelopment program, the pending Revera transaction and other potential acquisitions and capital structure initiatives. As Michael mentioned, we have been actively purchasing common shares through our issuer bid we initiated in June. The NCIB provides us the ability to purchase up to 7.8 million common shares for cancellation through to the end of June of 2023. And decisions regarding purchases of common shares will continue to be based on market conditions, share price and our outlook for our capital needs. With that, I'll pass the call back to Michael for his closing remarks.
Thanks, David. Extendicare remains focused on providing high-quality care for our residents, patients and clients as we advance our transition to a growth-oriented long-term care and home healthcare provider. We continue to face challenges from the pandemic and its aftermath, including inflationary pressures and a very tight labor market. Accordingly, our financial performance will continue to be uneven due to the timing of government funding increases in COVID-related support.
Our strategic transactions with Revera and Axium will position us well to leverage our significant experience and scale to meet the growing demand for seniors care, which is being driven by demographic trends. Despite near-term volatility related to the pandemic, we remain optimistic about our positioning for growth and at the same time, sustainable value creation for our shareholders. Finally, we want to thank everyone across our organization for their dedication and commitment to our residents, patients and our mission to help people live better.
With that, we'll be happy to take any questions you might have.
[Operator Instructions]. Our first question comes from Jonathan Kelcher of TD Securities.
First question, just on I guess, on LTC. And just to start -- I just wanted to clarify, you had 0.8 million for not being full occupancy. That's the hit you took in Q3. Is that correct?
That's the year-to-date total, Jonathan. We've provided -- we look at it every quarter. So year-to-date, that's cumulative 800,000.
Okay. So you've been providing for it all along. It wasn't just a cost in...
Yes, not all in the quarter.
Okay. That helps. And then on the estimated cost of phasing out the ward-style beds of $1.1 million. How did you come to that? Is that just all the funding for those beds?
Yes, that is our best view of the proposed phase-out. It's really focused on the OA side of the equation on the homes. So it's basically looking at what the OA funding is for those beds and then the timing of our construction projects because as I mentioned, 76 of the 185 beds to come back into service in our 2 new homes that are expected to be finished by the end of next year. So it's a focus on the OA funding and the timing of when we think we'd be phasing out the 76 beds or so into the new homes.
Okay. And then just flipping over the home health care, the 5.7% margin that you showed as adjusted is like if you guys are stuck on 25,000 hours, which it seems just given all the labor issues that it's hard to see it going much higher than that over the near term is 5.5% to 6%, how we should think about margins? Or is there -- should they -- can they trend up from there?
Yes, I think a couple of thoughts on that. I guess, 2 things. There's a number of cost elements in our structure today with the magnitude of the staffing capacity challenges and the turnover that we've spoken about in the staffing. So there's a lot of inefficiency in our system in terms of scheduling, rescheduling book offs, sick leave, pay, given we have -- we're still sending our staff a little further. We have a temporary fuel surcharge or fuel rebate that we've given our employees to try and combat the cost of fuel. So a lot of that is temporary and transient. I guess my best view of that because outlook and guidance is hard here. But if you go back to 2021 and you look at our pattern as we were able to recover out of that and some of that inflationary pressure wasn't there.
You could see a progression in the margins as we've recovered our volumes. There was a lot of cost and efficiencies, but there is a lot of leverage there to see margin improvements as the volume comes back up again. So hard to say for Q4 and Q1 is we're still dealing with a sheer number of cases out there in terms of COVID and impacts the staffing and the broader tightness in the labor market. So longer term, we do think we should see margin progression back towards those levels that we were seeing back in '21 as we were coming out of the depths of the first waves of the pandemic, but exactly the trajectory of that and how fast we can start to see some of that return and improvement above these levels. It's going to take a bit of time into next year.
Okay. And then at the margin you show on Slide 10 of your deck, that's your best guess or I don't want to say best guess, but that's what you think they would be excluding collate and all one-time type of things.
Well, that adjusted margin in the little table is adjusted out for COVID and workers comp one time. So that is that out some of the effects of the costs.
So more you're through long term.
Yes.
[Operator Instructions] Our next question comes from Tal Woolley of National Bank Financial.
I guess, Michael, my first question is the absenteeism issue continues to be a lingering a challenge coming out of COVID, you're CEO of a commercial enterprise, you are a medical doctor. I guess like what I'm asking is, are the COVID protocols we've got right? Are we getting a balance rate between patient protection and the cost to deliver services in your opinion?
Yes. Look, I just had a couple of perspectives on this. Good question. A lot of what we're seeing right now is still lingering pandemic effects, but also the aftermath of the pandemic particularly in terms of the surge in inflation and the very, very tight labor market. Obviously, central banks around the world are working on that. And so these are conditions that will subside probably in 2023, anybody guess how quickly that will happen. In the meantime, much is happening to bring new caregivers into the health sector. So the governments are responding to this challenge with expanded college programs, higher immigration targets, revised credentialing rules.
And these things will materially improve the availability of clinical professionals but it will take some time for those to have their effect. In the meantime, we're focusing our efforts on our retention programs to complement the recruiting that we've been doing to try to increase utilization of existing staff and to improve conditions for staff in the form of things like guaranteed hours more full-time positions, stronger relationships with supervisors at hence, training, et cetera. So really, when you add it out, we're experiencing a challenge that is really directly related to the pandemic and its aftermath. And we do believe that as these conditions abate will return to growth.
And as David was saying, we delivered a 9.7% margin last year at this time. And we're confident that we'll get there again and return to growth as the market normalizes. As far as whether just to directly address your question about whether our pandemic response is appropriate. I think you can always simple with when things are initiated and when things are ending. But broadly, I think we've got it right. The test of that is really the pressure that we're seeing on hospitals and whether the healthcare system is able to manage the level of infections that we're seeing in the community. And I think we're running that pretty close to the red line. So I think we're going to continue to have some challenge over the -- and debate over the next 4 or 5 months as to what is the appropriate public health response to this situation as we come out of the pandemic and get to more normal flu season and other viral pathogens that are always there, but are coming back with a bit of a vengeance this year because they've been absent for the last couple of years.
When you think about the itself, what's your working theory for how long it could take for it to really be squashed in terms of just not seeing the case volume and stuff like that. I appreciate that variance come along and they may be less harmful, but it's still obviously having an impact on service delivery and the healthcare system. What's the best thinking of right now in terms of like how long it will take for us to really wind down?
So look, the first thing I would say in answer to that question is there's a lot of other people much better qualified to predict that than me.
For sure.
And I would also say that those better-qualified people have been getting it wrong for a couple of years. So far be it for me to make that prediction. But I would point to a data point that just came out this week, the World Health Organization has been looking at COVID-related death rates worldwide. And this year, they're down 90% from where they were last year. So we are clearly in the waiting phase of the pandemic in that period when it becomes endemic and when the whole population develops resistance to the virus. So we're definitely in that declining phase.
Exactly how long that will take. I think most people feel that we're going to have a bit of a challenging winter, although the debate is whether the winter issue is really coved or it's going to be more other viruses like influenza, respiratory syncytial virus has been quite significant this year. So I think all the indicators are that we're getting back to normal, although still reacting to the wide swath that the pandemic have cut into the whole healthcare dynamic. So we're getting there. We've reflected on the fact that this is our 11th quarter of reporting COVID impacts on the business. I think we've got a couple more quarters to go, certainly, Q4, Q1. And then after that, it's anybody's guess, but I do think we're on the declining side of this curve.
Okay. That's helpful. I appreciate that. And then just wondering if and I apologize I missed some of the preamble, this was covered. But just with respect to the strategic transactions with Revera and Axium, can you give us just some ideas on what's your best estimate on the timing of the acquisition of the Revera Class A equity interests, the transition of the Rivera-Class C beds and the beginning of the drop-downs to Axium.
Yes. We do not have good visibility on that. I'd remind you of a couple of things. So first of all, we're looking for approval from 2 different provinces. So we've got 2 different regulatory processes that we are navigating. We don't have any indication of what the timing might be. We're certainly hoping to get approval early in 2023, but that's not a prediction. So unfortunately, I can't really provide much more clarity than that. Certainly, when we get some clarity, we'll let the market know.
Is the expectation that all of these things will get approved simultaneously? Or does it happen in pieces?
We proposed it as a single approval. That's the nature of our application because all of these things are very much related to each other. But again, I can't really predict how the government might want to parse through the elements of our transactions.
And with the Class C JV with Axium, I'm just wondering, can you get a blanket approval for that structure? Or does each dropdown have to get approved?
Well, I think there's probably 2 elements there. So the first is that any license transfer is going to require a separate approval. So but that doesn't necessarily involve significant delays for a single home. And certainly, the thinking is that once the framework has been approved that individual transactions will not be a heavy lift, and we actually have a precedent for that because we've seen this kind of capital structure joint venture before. Certainly, Revera has had that with Axium for some years. And that has not introduced any significant delays in the ability to redevelop homes. So we would anticipate that, that's the way it would continue going forward.
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, everyone, for joining us today. Please don't hesitate to give us a call if you have any questions.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.