Extendicare Inc
TSX:EXE
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Extendicare Inc
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Good morning, ladies and gentlemen, welcome to the Extendicare Inc. fourth quarter conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Ms. Jillian Fountain. Please go ahead.
Thank you, Patrick. Good morning, everyone, and welcome to Extendicare's 2017 Fourth Quarter and Year-end Results Conference Call. With me today are Tim Lukenda, Extendicare's President and CEO; and Elaine Everson, your VP and CFO. Our year-end results were disseminated yesterday and are available on our website along with the supplemental information package. 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 from noon today until midnight on March 16. The replay numbers and passcode 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 regarding our future operation. 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 commission and suggest that you refer to those filings.As we discuss our performance, please bear in mind that all figures are in Canadian dollars, unless otherwise noted.With that, I'll turn the call over to Tim.
Thanks, Jillian, and good morning, everyone. Extendicare operates across the spectrum of senior's care and across the country to meet the needs of a growing seniors population in Canada. As you can see on Slide 3, our services are provided under various brands: long-term care under the Extendicare brand, retirement under the Esprit Lifestyles Communities brand, home health care through ParaMed, management and consulting as offered by Extendicare Assist and group purchasing services are offered through SGP Purchasing Partner Network. Each of these brands has its own unique opportunity to deliver care and services to the Canadian senior. We are excited about these growth opportunities, and I will speak further about that this morning. Collectively, we are a unique investment opportunity in the Canadian market positioned to meet the needs of the Canadian senior when and where they need us. Turning to our financial results on Slide 4, I will highlight our Canadian operations and Elaine will speak to our consolidated results later in the presentation. This quarter, we reported $279.1 million of revenue, up 1.4% over $275.3 million for the fourth quarter of 2016. NOI reported this quarter was higher by 3.4%, but was moderated by a 2016 favorable accrual adjustment. Prior to the impact of that item, the Canadian operation's NOI improved by 8.8%, reflecting LTC funding enhancements, growth in our retirement, management and group purchasing operations and an increased contribution from our home health care segment. And our AFFO of $15.7 million compares to $11.7 million in the same period of last year, an increase of 34%, reflecting improvement in earnings and lower maintenance CapEx, offset in part by the depletion of income support of $1.4 million from the retirement acquisitions we made in 2015 and 2016. Turning to our results for the full year also on Slide 4. Our Canadian operations revenue and NOI each grew by 3.3%, resulting in an NOI margin of 12%, reflecting growth in our home health care business volumes and retirement operations, partially offset by increased cost of resident care. Similar to our quarterly results, after adjusting for the impact of favorable prior year adjustments recorded in 2016, the NOI growth in Canadian operations would have been 5.1%. Our AFFO from Canadian operations of $58.4 million was basically flat compared to 2016. The increased NOI contribution, together with a slightly lower level of CapEx spending this year, was offset by a depletion of income support from prior acquisitions, which had benefited 2016 AFFO by $6.2 million. Turning to our Esprit Lifestyles division on Slide 5. We have made solid progress with the continued growth in revenue, NOI and occupancy in all communities. The improved contribution for the year from our 4 same-store communities, 3 of which have achieved stabilized occupancy, was $700,000. The remaining communities are in lease-up, and in aggregate, contributed $1.1 million of the improvement year-over-year. Occupancy at our 3 stabilized communities reached 95.9% at the end of December and the community still on lease-ups saw an improvement in occupancy from 41.5% at the end of 2016 to 68.6% at the end of 2017. We are pleased with the growth in occupancy over this past year and the continued progress since year-end. Our eighth retirement community, the new 103-suite Douglas Crossing, welcomed its first resident on October 30, 2017. We are extremely pleased with the level of interest in this community, currently at 71% occupancy after only 4 months, significantly ahead of schedule. As a result, we accelerated our expansion plans for this community and we are well underway with the construction of a 47-suite addition anticipated to be completed in late 2018. The total project, once complete, will have an estimated adjusted development cost of $40.3 million and an $8.6 million expected NOI yield. Additional development projects are underway in attractive markets in Bolton, Ontario, 112 suites; and Barrie, Ontario, 124 suites, expected to be accepting their first guests by Q4 of 2018 and Q2 of 2019, respectively. These development projects are expected to deliver NOI yields of 7.6% and 8%, attractive yields relative to many acquisitions in the sector of late. Earlier this week, we announced the signing of a purchase agreement to acquire the Lynde Creek Retirement Community. The Lynde Creek Retirement Community consists of the Manor, a private pay retirement residence with 93 suites offering independent supportive living and assisted living; a life lease village; and a parcel of excess developable land. We are very excited about this acquisition in a strong market in Whitby, Ontario. The Manor is a high-end retirement residence with a waiting list due to its strong reputation and inviting environment. Adjacent to the Manor is a 3.7-acre surplus lot of land overlooking the ravine of Lynde Creek, creating an ideal part for you to expand of the service offering of this community with a potential independent living development. In addition, the Village is a 113-unit townhome development in the form of a life lease, a unique model for the Canadian retirement marketplace. We expect this part of the development to not only provide a potential feeder source for the Manor as residents age and their needs increase, but to also provide us with the ability to offer ParaMed home health care services to the occupants, enabling them to remain in their homes longer. Finally, the townhomes provide an expected annual cash flow stream equal to 10% of the resale value on change of ownership of the units. Post completion of the development pipeline underway and the Lynde Creek acquisition, our Esprit retirement platform, which we launched a mere 2 years ago, will be up to 11 communities with 1,052 suites. Turning to our long-term care operations on Slide 9. NOI for the year was impacted by prior year accrual adjustments, and as a result, this segment appears as a decrease of $1.7 million or 2.2%. Our average occupancy has remained strong at 97.7%, although we did see a slight decrease in the fourth quarter due to the impact of outbreaks, which have been significant this year. In Ontario, the private occupancy at our A homes has continued to grow and at our C homes has returned to strong levels in excess of 98%. In February, we completed a 24-bed addition at our LTC center in Edmonton, which is anticipated to reach capacity in the second quarter of this year and contribute approximately $600,000 of NOI annually. As we've previously indicated, we are actively pursuing the redevelopment of our Ontario C bed homes with plans to spend approximately $400 million over the next 5 years. The Ministry of Health has recently announced plans for 5,000 new LTC beds and has called for applications. We believe these beds are principally intended to incentivize operators to redevelop by topping up the number of beds to be built. To date, we have submitted applications to the ministry for 16 projects and are submitting applications under the RFP for approximately 400 to 500 incremental beds to leverage the opportunity to increase home sizes as part of the redevelopment where there is a need and a business case. We received word from the ministry that our first redevelopment project is in the final stages of approval, and we are optimistic about breaking ground in 2018. This 256-bed project is in Stittsville, Ontario, a growing suburb of Ottawa, and will be part of a beautiful campus of care. And we continue to work collaboratively with the ministry to move all of our projects through the approval process. Turning to our home health care business on Slide 11. We continue to seek growth in our home health business with an increase in the NOI this year to $3.6 million or 9%. This growth was due to a 4.1% increase in daily hours served, partially offset by 1 less day in this calendar year. Our NOI margin for the year reflected an improvement from 9.7% to 10.1%. We continue to focus on initiatives to improve efficiency and reduce costs in our home -- in our core home health care operations. Despite some headwinds caused by PSW shortages and related margin pressures, we remain bullish on the opportunity that we have to grow as Canada's largest private sector home care provider. Our other Canadian operations consist of our Extendicare Assist Management and Consulting Services and SGP Purchasing Partner Network. These business units continued to see growth during 2017, and we are experiencing increased demand for our day-to-day management services and in connection with clients' redevelopment efforts where we provide analysis, application support and development services. By associating with SGP Purchasing Partner Network, our clients receive help in managing rising costs by leveraging the buying power of a larger organization experienced in buying the products and services. With the addition of 416 beds scheduled to on board this month, Extendicare Assist will have replaced the turnover in contracts and has increased its client base by almost 5% since the end of 2016. As for SGP, the volume growth continues with the number of third-party residents served increasing by 10% from a year ago to 45,200 at the end of 2017. For the year, NOI from Assist and SGP was up about 5%, contributing an extra $500,000 or $10.4 million in total. With that, I will turn things over to Elaine to review our consolidated results. Elaine?
Thanks, Tim, and good morning, everyone. Tim has focused his remarks around our Canadian operations, and I will touch briefly now on our reported consolidated results on Slide 14. Consolidated NOI was up this quarter by $1.9 million or 5.5% and the reported NOI margin was 12.7% compared to 12.2% in Q4 of 2016. This improvement reflected an increase in the NOI from Canadian operations as well as investment income from the Captive. Our consolidated NOI in 2017 of $135.8 million reflected a year-over-year increase of $5.7 million or 4.4%, and similarly, this was primarily as a result of the improvements from the Canadian operations and higher Captive income. The NOI margin, on a consolidated basis, saw a margin improvement to 12.4% from 12.3% in the prior year. Turning to Slide 15. AFFO from Canadian continuing operations for 2017 was $58.4 million, representing $0.657 per basic share compared to $58.6 million or $0.663 per basic share in 2016. And as Tim previously mentioned, while we saw increased contributions from earnings and a decline in our maintenance CapEx spend, the AFFO in 2017 was impacted by the depletion of the income support recorded in 2016. Our maintenance CapEx spend for the year was $8.8 million compared to $12.1 million in 2016, representing 0.8% of revenue this year and 1.1% of facility-based revenue last year. We would expect to spend in the range of $9 million to $10 million annually. Our payout ratio was 73% of Canadian FFO for 2017 compared to 72% for the 2016 year. Now turning to our financial position on Slide 16. Our total long-term debt at December 31 was $543.4 million. The change in debt levels from the beginning of the year reflects the issuance in May of a $30 million 5-year term loan that's secured by 9 Alberta properties and by draws on our construction loans for the retirement development projects. At December 31, our weighted average interest rate was 5% and the weighted average term to maturity on that debt was 7 years. Our debt-to-GBV was 46.8%, and EBIT-to-interest coverage was unchanged from last year at 3.3x. We ended the year with cash on hand of $128 million, representing an increase of $26 million from the end of last year with cash from operating activities of our continuing operations in excess of our cash distributions. In the fourth quarter, we arranged for a $65 million demand credit facility secured by our home health care business that is available for general corporate use, providing us flexibility and further capacity to continue to execute on our growth strategy. Nothing has been drawn on this line to date. During 2017, we were active under our normal course issuer bid and acquired for cancellation approximately 696,000 common shares for about $6.5 million. And in January, we acquired a further 352,000 shares for $3.1 million. We intend to continue to buy back shares under our NCIB, being mindful of where the shares are in relation to the consensus NAV. The runoff of claims of our Captive since the sale of the U.S. operations has allowed us to release reserves and free up cash in the Captive. In April, we repatriated USD 10 million of cash from our Captive and a further USD 6 million in the fourth quarter. We anticipate that there may be additional reserves available once remaining claims are resolved.With that, I would now like to turn it back to Tim for his concluding remarks.
Thanks, Elaine. In conclusion, 2017 reflects continued execution towards our stated strategy to grow in all of our business lines while increasing our proportion of private pay revenue from retirement living, and in many ways, we are just getting started. Growing demand for senior care and services in Canada ensures the opportunity that lies ahead. It is our goal to seize these opportunities as a leader in the sector and to meet the needs of the Canadian senior and their family where and when they need us, and in doing so, to generate a return for our investors who support our mission. With that, we'd be happy to entertain any questions.
[Operator Instructions] We have a question from Jonathan Kelcher from TD Securities.
First off on the retirement developments. Can you define what you mean by adjusted development costs?
Yes.
Sure. Adjusted development costs would include our hard costs, our GAAP-related costs related to construction, as well as the accumulated NOI of the development from the day we opened to the day we reached stabilized occupancy and an imputed interest over that period of time from when we begin construction until we reach stabilized occupancy.
Okay. And then -- so the yield is basically the stabilized NOI over top of that adjusted development costs?
Yes, exactly.
Okay. And when you get the 11 retirement communities completely stabilized, what percent of your overall NOI will that roughly be?
I'll get back to you with a percent. But we are -- I would estimate that once we get the full complement of those communities stabilized, they'd probably contribute NOI in the $20 million to $22 million range.
Okay. And then just to follow on to that, like longer term, Tim, what's your sort of target in terms of NOI contribution from all your businesses?
Well, what we've tried to indicate over the last couple of years is a goal, Jonathan, of -- we've called it rebalancing our contribution of NOI from each of our business units. So long-term care longer term will still be the largest of our 3 segments. But we anticipate that our retirement will grow to be roughly 1/3 of our overall NOI as well as retirement and then the balance being -- so we'll have both, yes, maybe it's 60% between retirement and home health care and 40%, or I guess, 30-some percent long-term care and the balance being our other services. So we want to significantly grow that retirement piece as a proportion of the total.
Okay. And you see doing that sort of half through development, half through acquisition or ...
Yes, we're going to continue to pursue both. We want to be smart and selective about our retirement acquisitions and make sure that they are generally -- accretion is our threshold. We want to make sure they're accretive when we do acquisitions. And then we are selective about picking our markets as we were with our Douglas Crossing in Uxbridge to try to find attractive markets to do the development that will achieve equal or better returns from development projects once you factor in the time to fill.
Okay. And then just 2 little quick ones here. How much did you attribute to the developer land at Lynde Creek?
We attributed about $2 million of the purchase price to that.
Okay. So the caps -- the cap rates on the rest of that then?
Yes, that's correct.
Okay. And then tax rate for next year.
I would use, consistent with the guidance we've had till now, between 18% and 20%.
The next question is from Michael Smith from RBC Capital Markets.
Tim, I'm just wondering, so if you could -- can you give us an update on the home health care business and some of the initiatives you took over the last little bit of time? Like are you pretty much through that exercise? And anyhow, just wanted to get some color on how that -- those efforts to streamline the business are going.
Sure, Michael, I'd be happy to. We continue to work on a number of initiatives related to our home health care operations. The biggest and overarching initiative relates to moving our IT platform, our software platform, with 3 different systems as a result of the acquisitions into one new software platform that has the ability to do enhanced scheduling and other things beyond where we were with our prior systems. That's been a very intensive exercise, but one that is going well and will still take the better part of this year to implement fully. So that's an ongoing process that we think will reap some rewards both in efficiency and information, access to data and other things coming out of that system over time. Beyond that, we also had initiatives underway related to developing kind of a streamlined and modeled branch in each of our locations and combining branches. We've combined, I think, most of the branches now that are going to be combined, but there's still some work to do in terms of the staffing complement and other things related to each of the branches. So that's something that's been a branch-by-branch exercise and we're making some headway, but fine-tuning as we go and as we learn more from the implementation of those types of restructuring changes at the branch level. Overall, things are going well, but we are seeing some pressures in terms of wage cost increases or wage pressures, staffing pressures related to shortages of PSWs and our desire to make sure that we continue to be an employer of choice with PSW -- with PSWs generally and nurses for our home health care services in order that we can meet our expected growing volumes that we're seeing from the government. So there'll be a little bit of, I guess, lumpiness as we grow in terms of that margin expectation, but we still have a view to trying to improve it over time.
Okay, good, very helpful. And that shortage, is it concentrated in any particular region? Or is it just an overall issue?
It's really a Canadian-wide issue, more acute in Ontario. The increase in the minimum wage in Ontario doesn't help, quite frankly, because it creates other opportunities for employees to choose other sectors in some cases. But what we're doing is trying to make sure that our wages make and our benefit packages and everything related to it make our employment offering attractive for people to choose ParaMed as a career opportunity and we're looking at a number of different ways of doing that, both economically and with other things to try to incentivize employees. We also anticipate that there will be some government funding to offset some of the wage pressures that we're seeing from the result of the implementation of the minimum wage increase.
Okay, good. And just switching gears, I wonder if could you give us a few examples of where you have a situation where you're applying for -- to rebuild an LTC property and you're going to top up the number of units.
Yes. Some of these, we haven't disclosed specific communities as of yet. But we've got -- our Stittsville project, as I mentioned, is already underway and there's no change in the number of beds being applied there. But we have at least 8 other locations, maybe 10 other locations, where we're adding -- where we're taking what was the number of beds in the existing development, and by applying for new beds under the RFP, we're increasing it to the multiples of 32, if you will, and increasing the size and scale of the operation in what will be a new greenfield building to replace the older buildings. So in every one of these cases, except for one that I can think of, we're actually replacing the building and adding capacity through this RFP process. So where we thought they were viable projects but tight, adding beds to it incrementally enhances the return possible from a redevelopment project. And I think that's what was behind the ministry's RFP surprise announcement, frankly, was to try to incentivize more people to move forward by sweetening the offering a little bit through new beds instead of enhanced funding on the existing beds.
Sure. And just ballpark are you adding typically 10 beds kind of thing or 10, 15, that kind of thing? I know it has to be a 32 multiple at the end of the day.
Yes. No, a little more than that typically, I'm looking at a list. And again, we haven't announced the communities yet, but we've got 42, 40, 84, 51 that we're applying for in different markets. So it really varies depending on what we think the market will bear, land that we're targeting and the existing building versus the optimal size of a building. So that determines. In many cases, we're going to our 256 prototype; in some cases, we're going to 192.
And so, Michael, I'd just like to add to that, too. The other opportunity that comes with this -- with the 5,000 beds, we are also taking that opportunity to look where campuses of care makes sense because they're -- this opportunity provides additional capacity. And so our land search to match up with these applications that we're contemplating is going to take into account, is there a market for private pay in the area, can we do a campus because we'd like to see more of those come out of that process, too.
So then you'll just get -- buy some extra land for that?
Exactly. Yes, exactly.
In that example you gave, Tim, let's say the one, I think, it was 84. Would that be for one particular property? Or would that be for one group in a particular area?
Well, that's for one particular property. So that's an example where a community had 172 beds and we're going to 256.
And where they're -- when you look at the capacity and the...
Demand.
The underserviced demand, there are some communities where there are just not enough beds and so this provided an opportunity to maybe meet that need, the lens, desire and top up our development.
Yes, the number of beds was determined in consultation with the local health networks where they're indicating a significant need and it matched our ability to add incremental beds.
Well, that must -- particularly in that case, that must really be a big boost to the economics, I would think.
Very much so, both in terms of cost per square foot of construction and incremental EBITDA possibility.
Yes, the operating efficiency of having a building that sort of meets that rather than odd sizes pays back, too.
[Operator Instructions] The next question is from Doug Loe from Echelon Partners.
Just a little bit of a strategic question, I guess. I mean, I know you've talked in the past about all the elements of the elder care continuum of care where Extendicare could add value and you clearly have your plates full with extending your assisted living framework while looking at the refurbishment of your C-level facilities. So I'm not trying to add work to your calendar there, but just wondered if in the current funding environment if you have explored any of the other ancillary services that sort of feed into elder care, like long-term care pharmacy, physio rehab. You clearly have some solid work in group purchasing and consulting services. So just kind of thinking ahead a little bit, just kind of wondering where you think Extendicare might sort of cast its gaze in the continuum and just sort of expand your existing infrastructure in nursing care, home care and in assisted living? And I'll leave it there.
Doug, it's an excellent question and we always appreciate the suggestions. We do think that we've got a great platform in terms of our footprint in the communities as well as a delivery vehicle through Extendicare Assist and SGP that allows us to think that way about what incremental services we can provide. Pharmacy is a business that is you have to be, I think, a fairly big player in that area and it's probably not an area that we would be, with all the changes that are occurring, that we would be looking at any time soon. But in terms of extension of the services that are more related -- directly related to some of the things we do like physiotherapy and other services of that nature, we're certainly going to continue to look for opportunities to expand the nature of the things that we do to the clientele that we have presently. Elaine, you were just going to...
Yes, no, I was just going to say in our facility that we've built up in Sault Ste. Marie, we actually, as part of that construction, we're able to create a nice large rehab space, anticipating that as growth in that facet of extension.
Yes, exactly. And I think part of this growth, not only our availability of these services, but I think part of the philosophy of the continuum of care where we feel like there will be more downloading of things that currently occur in hospitals or in the community over time that can occur in long-term care. And then some of the people that are in long-term care can be cared for in the community or in retirement communities. So it's that movement along the continuum of care for people to get the highest-value service at the lowest cost. And we think that, over time, that's going to open up opportunities for other services that we can provide.
No, that's great. Maybe just, while I've got the floor, just one other question occurred to me. With the pending changes in legislation for use of medical cannabis, it strikes me that, that could be relevant in pain management within your home care framework. So say what you want to say on that, I was just wondering if you've had any strategic thoughts on how that might relate to your business.
Oh, boy. I really don't at this point. I think the safe thing is to say I don't know. I don't know where that goes. I mean, certainly, it's going to be an issue that we'll be dealing with like the rest of society in figuring out how that may impact on the residents in our buildings. But we certainly expect that there will be issues and opportunities, I guess, around the issue of medical marijuana.
There are no further questions registered at this time. I would like to turn the meeting back over to Ms. Fountain.
Thank you, Patrick. That concludes our call for today. The presentation is available on our website, as all the call-in numbers for an archived recording. Thank you again, everyone, for joining us. Please do not hesitate to give us a call if you have any further questions. Thank you, and have a good rest of your day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.