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, Ms. Fountain.
Thanks, Lauren. Good morning, everyone, and welcome to Extendicare's 2018 Fourth and Year-end Results Conference Call. With me today is your President and CEO, Michael Guerriere; and Elaine Everson, your Vice President and CFO.Our 2018 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 15. 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 this call may include forward-looking statements regarding our future operations. 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 Michael.
Thank you, Jillian, and good morning, everyone. As you know, Extendicare operates across the spectrum of seniors care in Canada to meet the needs of the growing seniors population.On Slide 3, you can see each of our brands that together spend a continuum of seniors care. We won't be able to meet their needs by using the same approaches we always have. The recent announcements in Ontario make this clear. We're moving toward a world where integrated care, centered on the needs of the patient, is the new standard.Integrated service providers like Extendicare will have a distinct advantage in meeting these new requirements. A one-stop shop for care across the continuum is increasingly what our customers want. We will need some innovative approaches that leverage new technology to help seniors thrive in their own homes longer before needing assisted living or long-term care.I believe Extendicare is uniquely positioned to bring those innovative solutions to market to cover the full spectrum from home care to retirement to long-term care. Combined with the steady expansion in this market driven by demographic fundamentals, there's a substantial opportunity to build shareholder value.Since our last call, our bolt-in retirement home has opened, and we added 6,000 third-party residents to our Silver Group Purchasing customer base, which you're going to see across the bottom of the slide. If you move to Slide 4, you can see that our results in the quarter continue to show the impact of our technology implementation in the home care division. While revenue growth was higher than average for the year, NOI was dragged down by expenses in our home care division. That and higher maintenance Capex was responsible for the notable reduction in AFFO for the quarter. Growth in long-term care, retirement, contract management and group purchasing were all strong, tempered by flat revenue in the home health care operations.Moving to Slide 5, we can see the home care details. Revenue was flat from the year-earlier quarter. This is consistent with the stall in growth that we have experienced in this business over the past 2 years. In order to address this situation, we are upgrading our technology across the business. In the last call, I reported that we were 20% complete in that effort. Progress since the last call has resulted in branches delivering, 53% of our care volume are now using the new system.In response to your questions about the cost of the implementation, we've disclosed the system cost as well as the budget for 2019 on the project. We spent $3.3 million at the EBITDA level in 2018 and plan to spend $5 million this year to finish the job. These costs will drop off in 2020, helping to boost margins. More importantly, we'll be able to leverage the system to capture more revenue, improve efficiency and drive higher margins. Better scheduling will also allow us to offer more hours to our workers, thus increasing their weekly wages.We believe this is key to continuing the reduction in turnover that we've been experiencing in recent months. I note that the total hours of care delivered in Q4, although they're down year-over-year, have increased by 1.5% over Q3. That's the first quarter-over-quarter increase in volume that we have experienced in 2 years.As our reforms take root in more offices, we will see increasing volume gains, followed later in the year by margin expansion. Note also that our current executive leadership team at ParaMed is leaving at the end of the month. We are in the midst of recruiting new leadership for the division to continue the retooling of the business. It will take most of fiscal 2019 to complete the implementation. This work is disruptive, causing a transient slowdown in activity in each office that we implement. Taken together, these factors will result in profitability headwinds for the next 3 quarters.Let's turn to long-term care on Slide 6. We were pleased with our long-term care performance in Q4 with revenue growth of 3.8% and NOI up 2.5% year-over-year. Occupancy experienced some pressure due to a variety of local factors that have resolved since the end of December. On the redevelopment front, as previously announced, we're proceeding with the redevelopment of Stittsville near Ottawa and Sudbury. Both are 256-bed centers. We plan to break ground on both of them early in 2019. We were granted 158 new long-term care beds in connection with the redevelopment of 3 of our other projects in Sault Ste. Marie, Sudbury and in Peterborough, which are all still in the government's review process. We continue to be encouraged by the emphasis the new Ontario government has put on new long-term care beds to reduce ALC pressure in acute care hospitals. We will continue to apply for allocations of new beds to leverage the redevelopment of our older centers and to initiate new campus of care opportunities.In all, we have 21 long-term care centers in Ontario to redevelop, and we continue to work collaboratively with the Ministry of Health to move all our projects through the approval process.Each project is unique, and therefore, the cost associated with redevelopment can vary widely, influenced by factors such as size, location, local development fees, market demand, construction cost and availability of land. At this time, a number of projects in our queue are not meeting our internal thresholds, but we will continue to explore options to improve the economics. We will exercise discipline in launching these projects, ensuring that each meets our investment return criteria before we proceed.Turning to our Esprit Lifestyle division on Slide 7. Revenue is up 48.2% over the prior-year quarter, and NOI is up 126% due to higher occupancy in both our existing properties and our new communities. Our stabilized properties maintained 94.8% occupancy at the end of the quarter, and our lease-up properties, of which there are 4, Yorkton Crossing, West Park Crossing in Saskatchewan, Cedar Crossing and Douglas Crossing in Ontario, reached 80.6% occupancy by the end of the quarter. We have been very pleased with the performance, fill-up pace and yields for our Ontario retirement communities. However, our Saskatchewan acquisitions have not met our expectations, as they have been impacted by local market factors, including new competition. There have been pressure on monthly rates as well as challenges achieving stabilized occupancy levels.Given their current performance and considering the market and its likely impact on future performance, we've determined that it is appropriate to record an impairment charge on Riverbend, West Park and Yorkton. We took a charge of just under $16 million to reflect our changed expectations of these investments.We are very pleased with the continued growth of our retirement operations through acquisition and development. After year-end, our bolt-in site opened with an additional 112 beds for lease up. Barrieview's opening is delayed a few months, but we'll open in Q4 this year. Bolton and Barrie are anticipated to deliver NOI yields of 7.8% and 8.2%, respectively. You can see these on Slide 8.Following completion of these 2 communities, our Esprit platform, which we launched 2.5 years ago, will have 11 communities with 1,052 suites. We are using the Barrieview retirement community to develop a smart retirement home concept, which we intend to be a prototype for future projects. We are exploring technologies that will enable independence by helping connect our residents with the information they need to stay well longer as well as offering them technologies that will help them to connect more effectively with their health care providers. We anticipate we will be able to use the same technology platform in our home care division to support seniors in their own homes as well.We are working on additional projects, 2 of which are expansions of existing communities. We're planning to double the size of Empire Crossing in Port Hope. If all goes well, we will begin construction on the expansion this year. We are also pursuing expansion of Lynde Creek, which features 3.7 acres of surplus land, ideal for an independent living development.On the next slide, you can see that revenue from an -- our Extendicare Assist Management and Consulting Services team and our Silver Group Purchasing partner network increased 12.8% over the prior year quarter. NOI growth of 20.5% resulted from margins of 61.7%. SGP continued to sign new contracts after the quarter-end, bringing the total to 57,000 residents by the end of February.We continue to experience increased demand for our day-to-day management services, and clients are contracting with us for assistance with their redevelopment efforts, where we provide analysis, application support and development services.With the recent announcement by the Ontario government that it plans to add 30,000 long-term care beds over 10 years, we see tremendous growth potential in this side of the business.So with that, I'll turn it over to Elaine to provide more details on the financial side. Elaine?
Thank you, Michael. Good morning, everyone. I'll provide you with an overview of our consolidated results beginning with the NOI contributions of each of our business segments.Turning to Slide 11. Our NOI generated from Canadian operations this quarter was $32.6 million, down $700,000 or 2.2% over the same period in 2017. As you can see, we benefited from $1.3 million incremental NOI from our retirement living operations this quarter, resulting from the improved occupancy as well as the contribution from the acquisition of Lynde Creek that we completed earlier this year.Our long-term care division and our management consulting and group purchasing operations, together, contributed an additional $1.1 million, resulting from LTC funding increases and the increase in the number of clients served in our Assist and SGP business.Our home health operations contributed $7.9 million of NOI, a reduction of $3.1 million over the same period last year. As Michael just indicated, we've been experiencing a decline in volumes compared to last year, and this quarter saw a reduction of 2.4% from the same quarter last year. Despite the lower volumes, we experienced increased labor costs this quarter. Similar factors impacted the NOI from Canadian operations for the year. We experienced a $3 million or 2.3% increase in NOI, despite the $5.8 million full year shortfall in our home care operations. And finally, our NOI margin for Canadian operations was 11.3% for the quarter but finished the year at 11.9% compared to the 12% for the 2018 year.Turning to Slide 12 and our consolidated revenue, NOI, EBITDA and AFFO. As I just outlined on Slide 11, NOI from Canadian operations for the quarter was lower by $700,000, and on a consolidated basis, the NOI reflected a total decline of $2.7 million. Consolidated NOI includes income and costs related to the run-off of our remaining self-insured liabilities in our captive. The lower level of investment income realized in 2018 versus 2017 was the other significant driver to the NOI reduction quarter-over-quarter. The investments that are held in the captive to settle self-insured liabilities and as a result of the earnings of the captive, do not impact AFFO, as settled claims are funded by its cash or investments.Increases in our administrative and lease costs resulted in our adjusted EBITDA of $22.5 million for the quarter compared to $27.5 million in the prior year, and included costs in support of ParaMed operational system rollout, a prior year favorable premium adjustment as well as higher compensation and professional fees.For the full year, the consolidated NOI of $134 million was similarly impacted by the lower captive income of $4.8 million, which offset the increase in the Canadian NOI of $3 million, I just spoke about.Higher administrative and lease cost of $1.6 million year-over-year were largely impacted by approximately $1 million in support of our system implementation, bringing the consolidated change in adjusted EBITDA to $3.4 million and a margin of 8.4% down from 8.9% last year. AFFO this quarter was $12.6 million or $0.142 per share, and for the year, was $57.8 million or $0.653 per share. In comparison to Q2 of -- Q4 of 2017, AFFO was down $3.1 million, reflecting the lower adjusted EBITDA, excluding the impact of the captive and noncash share-based compensation, plus an increase in our maintenance Capex and current income taxes.And for the 2018 full year, AFFO declined by $700,000, and was primarily impacted, again, by the improvement in the adjusted EBITDA, lower current income taxes but higher maintenance Capex.We expect our respective tax rate on AFFO will be in the range of 17% to 19% for the 2019 year. Our maintenance Capex was $12.7 million this year, which was about 1.1% of revenue, and we expect Capex to be in the range of $10 million to $12 million next year. Our payout ratio for the year was 73%, unchanged from 2017.Now turning to our financial position on Slide 13. Our total long-term debt at the end of the year was $544 million and relatively unchanged from December of 2017 with debt repayments offset by construction loan draws and a new mortgage on one of our retirement communities. At December 31, our weighted average interest rate was 4.9% and the weighted average term to maturity on our debt was 7 years. Our debt to gross book value was 48% and EBIT to interest coverage, relatively unchanged at 3.2x.We ended the year with cash on hand of $66 million, representing a decrease of $60 million from the end of last year, primarily attributable to the acquisition of Lynde Creek in the second quarter, from growth capital expenditures, purchases of common shares under our issuer bid and costs incurred in connection with the refinancing of our convertible debenture earlier this year.As Michael mentioned, one of our priorities is the redevelopment of our long-term care centers over the next number of years, which will necessitate raising funds through debt financings or capital markets, and we expect to get some of our projects underway during 2019 and will share more details as plans and timing is firmed up.And finally, with respect to our captive, our provisions for self-insured liabilities was USD 27 million at the end of December, down from USD 48 million at the beginning of the year. And we have USD 50 million of investments held to service those liabilities.Since the exit from the U.S. in 2015, we've repatriated a total of USD 28 million of cash from the captive. The run-off of claims in the captive continues as expected, and based on our year-end actuarial review, we expect further repatriation during 2019.With that, I'd like to turn it back over to Michael for his concluding remarks.
Thanks, Elaine. So in summary, we had strong results from Esprit, Assist and SGP, steady performance from long-term care and continuing weakness in the ParaMed division. Although we are optimistic about where we are going with our home care operations, we are not at all happy with the level of performance today.With new leadership and new systems, we are hitting the reset button on the home care business, and we are determined to drive better performance by the second half of 2019. This will be apparent first in volume growth followed by margin expansion.I'm looking forward to welcoming David Bacon as our new Senior Vice President and Chief Financial Officer, effective April 1. David has a wealth of experience that he will bring to the Extendicare management team. He has worked as a senior executive in a number of industries, including environmental services, logistics, renewable energy, and telecommunications. His 25 years of business experience in public markets, equity and debt financing, mergers and acquisition will be invaluable as we chart our growth trajectory.David will play a key strategic role in driving Extendicare's growth across all 4 business lines.I'm also delighted to announce that Elaine is moving into the newly created position of Vice President, Corporate Development. Elaine will provide much needed leadership for our capital projects portfolio, especially the long-term care, redevelopment program and our retirement community builds. Elaine is going to focus on building up our project development capacity to accelerate our redevelopment projects and to capitalize on the growth opportunities that exist in the market.She will also leverage her deep experience in the seniors care market to identify new initiatives to build our pipeline of development opportunities. Providing seniors with services across the spectrum of care is the key to our strategy.At Extendicare, we are unique in having the foundational building blocks in place to deliver that vision. With the investments we're making now in technology, platforms and leadership, we will be well positioned to meet the growing needs of seniors, whether or not they reside in one of our communities.In closing, I want to pay tribute to each one of our more than 23,000 staff at Extendicare, who work hard every day to make a difference for seniors. The passion they have for our mission is nothing short of inspiring. The quality of care we provide and the quality of lives that our residents and clients enjoy is our #1 priority and gives purpose to everything we do. I feel fortunate to be part of this team that is pursuing a mission so vital for Canadian society.So that concludes our formal remarks. And we'll now be happy to take any questions you may have.
[Operator Instructions] And the first question is from Jonathan Kelcher from TD Securities.
First question, I guess on ParaMed. Overall volumes were up a little bit versus Q3. What lift -- like how does that, sort of, segment down between the branches you have the new technology versus where you're still doing the implementation?
Well, paradoxically, we've had some initial reductions. We see a little bit of a reduction in volume in each of the branches where we implement initially, because the change in systems and all the training that goes on and the process retraining people on the processes that are required for the new system actually causes a transient reduction in their performance. So we see then the performance starts to pick up after that. But there's probably a 4- to 6-week initial period, where there's a decline in performance. So we're really starting to see at this point, volume increases in the implementations that we did back in the summer and fall of last year.
So the first 40% or so.
Yes. So there's definitely a lag of 2, 3 months before you start to see the volume picking up. But we're seeing that play out as we look branch by branch at the volume improvement. The other thing, Jonathan, that has an impact is that some of our offices have been better able to meet demands than others. So the backlog of demand is different in different regions of the province, so that also has a bit of an impact. The other thing that you didn't ask, but that's a factor in all of this is the turnover in the staff. And the difficulty that a lot of home care workers have is if they don't get enough hours from us of work to do then their total paycheck is not sufficient, and they look elsewhere. And I think that was a big driver of our turnover. So in our scheduling agenda, we're really focused on giving people more hours, trying to give people close to full-time hours, which we think is the key to improving retention. And in fact, we're seeing that bear out. Our turnover has dropped off quite significantly, since we've been paying more attention to this aspect. So the system is really helping us in a number of ways to improve our performance and drive volume up.
Okay. And then, I guess the $5 million you're going to spend, that would be over the first 3 quarters this year, where you think you'll have headwinds?
Yes, I think one of our offices might lag into Q4. So from the budget perspective, we've distributed it pretty equally over the course of the year. But so we've got a little bit of flex in there for a little bit of a delay. But so far things have been proceeding on course. And as we reported, over the last 3 months, we've been able to add really 1/3 of our volume on to the systems. So it's perking along quite quickly.
Okay, and then just last question on it. So given all the puts and takes, would you expect your ParaMed NOI to be relatively flat to 2018 at the -- for 2019 or plus a little bit or minus a little bit?
Yes, I think relatively flat is probably a starting point. Although, I would say by Q4, we'll be starting to see some expansion in those margins. I think what you'll see first is the revenue growth picking up again, and that will probably be the kind of headline story for 2019. Although, I would expect some margin growth to start to show up in Q4.
Okay. And then just one question on the G&A, it was a little elevated this quarter. What's a good run rate for 2019?
Jonathan, it's Elaine. I think a good run rate would be in the -- between 3% and 3.2%. I think is -- once you carve out -- no, if you include in those onetime costs because some of those are sitting in G&A, you're probably closer to 3.3% to 3.4%, but on a more normalized levels, 3.25% is a reasonable run rate, I think.
The next question is from Chris Couprie from CIBC.
I just want to kind of follow up on some of the questions that Jonathan was asking with respect to the home care. So in terms of the centers that you mentioned that 2 to 3 months after performance starts to pick up, what type of volume increase are you seeing in those centers relative to where they were before? Kind of, what I'm thinking about is, you did 11.3 million hours in 2017, once everything is kind of -- the IT is all rolled out, what type of relative volume growth to that level, do you think you could see?
Well, I guess there's a couple of answers to this questions. So the underlying growth in the market is about 4%. So we should be getting back to an annual growth rate of about 4% just by keeping pace with the market. But as you know, we turned away a lot of referrals last year that were part of our contractual commitments with the LHINs, so there's a catch-up opportunity there as well. The challenge with the catch-up opportunity, of course, is being sure that there's staff available. And we've looked at that very carefully, and just as carry on with the comments I were making earlier in terms of providing our team members with full-time hours, we're experimenting using the system with some very different scheduling algorithms to try to spread the demand out over the day so that people have a full roster of scheduled visits over the course of the day. And if we were successful in smoothing out that demand in a lot of those offices, we have the people to add about 25% volume without hiring anybody else. So -- but in those offices that have been challenged, we -- and some of them we turned down upwards of 40% of the volume that was being referred to us. So all that said, I think if you net it out across the entire business, we should be able to pick up on top of the baseline growth, another couple of percentage points. But I don't think we're going to get to those types of growth rates until we are fully implemented and all of our operations settle down. So we're talking about 2020 for that to happen.
Okay. And then just with respect to the new Ontario health organization, what's your understanding in terms of -- do you need to rebid on contracts because your existing ones are, I assume, are with the LHINs?
Yes, so the majority of our business is with the LHINs. It's very early days to comment on what's going to happen specifically in Ontario. The announcement that came this week clearly indicates that big changes are afoot. The whole host of health agencies, including the LHINs will be merged into this new agency, they're calling Ontario Health. And it's obviously a very big undertaking. So I think it's fair to say to -- that we expect that contracts that are with the LHINs today will have to be transferred, signed or reissued either to Ontario Health, or its assigns at some point. But we don't expect that transition to happen quickly. Bill 74 isn't even through the legislature yet, so there's a long way to go before this transition happens. And more fundamentally, the need for home care services is not going down. In fact, there's a backlog of unmet home care in many parts of the province. So however this shakes out, the demand for our services is going to continue to experience healthy growth. So we'll have to navigate this along with everybody else, but it's not the first time we've navigated these kinds of reorganizations. You may remember that we used to contract with the community care access centers, which were merged into the LHINs a few years ago, and that really didn't result in any change in our business trajectory. So we don't expect this to change it substantially, either.
So and just in terms of the profitability of this segment. So revenue for our, call it, was up just under 3% for the year, but your labor cost, excluding the impact of the IT or the implementation was up just over 4%. Are you going to see any kind of pickup in -- is any of that labor cost increase going to be flowed through potentially? Or what are we seeing in terms of cost pressures, continued cost pressures on the labor side?
Yes, a lot of our labor cost escalation has been in increased FTEs as opposed to increased hourly wages. We've added a lot of people, particularly as our retention efforts have worked. We have added a lot of people in terms of anticipating the volume growth that's coming as a result of the system. So we're a little out of balance. I mean, you can see that in our margins this quarter. I think we're going to be a little out of balance for Q1 as well with hiring people before you see that -- the productivity. But we will get that back into balance. So I don't think that, that escalation and labor cost is driven by kind of a rate compression issue.
Okay. So in Q4, how much of the labor cost would have been tied to the IT? I'm assuming that, that's where of the expense is being put through?
Well, no. We haven't put any of the labor cost in the home care branches through the IT projects. So the only labor cost in the IT project are actual IT implementation people and trainers that are dropping off at the end of the project. So we were very careful about just putting onetime costs into that -- into the IT costing. So the cost of people in the branch to deliver the service, particularly schedulers and coordinators in the back office have also been added, but we haven't included that as a onetime cost because the intention is that those people are needed to address the volume expansion that will result.
Okay, so just so I understand it. So when I'm looking at the expenses of the home care business, and you say that 98% is labor. So whatever the balance is, that's where the IT implementation costs are being put through?
I'm not sure if I'm -- let me try it another way, Chris, and see if this answers your question. Because we called out those onetime-type costs or system implementation-related costs for Procura. So in the 2018 year, we indicated there was about $3.3 million of incremental cost. Some of which are sitting in our G&A, and some of which are sitting in the NOI of ParaMed. So of the $2.3 million that's sitting in the NOI of ParaMed, that's about maybe $0.5 million related to implementation staffing, and the rest of it is more IT-related cost. So it's a small component of the overall labor cost. The bulk of it is the stuff that Michael was speaking about, us staffing up outside of those direct sales staff. Does that help?
Yes, I think that helps.
The next question is from Michael Smith.
Just a couple of quick questions. First just on the long-term care rebuilds. I'm just -- Michael, I think you mentioned that the -- some of the projects are not really meeting your return threshold. So I'm just wondering, have you increased your return threshold? Or is there just a re-evaluation and maybe cost inflation?
The latter. So we haven't changed our thresholds in any way. So there's a few things happening. One is that the whole portfolio in terms of moving forward with redevelopment has been slower than we've expected. The approvals coming out of the ministry have been slow. And we've been meeting with them to look for ways to try to speed that up. And that of course is being met with construction cost inflation in many regions of the province that frankly have been impressive. So projects that 3 years ago looked very viable, today aren't. And same with land cost in situations. We have land for a number of our projects, but for those that we don't, it's looking untenable at the current construction subsidy rates provided by the government that these projects will go forward. But I do know that this is the case for everyone in the long-term care sector. It's not just us. Projects and new approvals have really diminished to a trickle, and you can see that with the other players as well. So I think that one of several things are going to have to happen. One is, the government will have to reconsider its subsidy rates or the way it subsidizes. Or two, there's going have to be some changes that allow us to get either a higher return on capital, higher efficiency in their operations or just a lower cost of building them. So that might be -- we've seen some municipalities that'd be willing to provide us with land or to waive local development costs, development fees for the municipality. So those types of things help. But the other thing is that increasingly, we're looking at is taking homes that are more in the 150-bed range and topping them up with new licenses to push them into the 256-bed range, which just gives us far better economies of scale, particularly when you think about the land costs. So that -- it's not a coincidence that the 2 projects we're going forward with, Stittsville and Sudbury, are 256-bed groups. And the Sudbury 1, as an example, has 54 new beds, new licenses to get it to a more efficient size. So we're really looking at all the ways that we need to work to optimize those projects. But as I just said, I mean, we're going to be very disciplined about which projects we let forward. They need to meet a return threshold before we're going to pull the trigger.
Okay, that makes total sense. And just last question. Do you have a range of how much capital do you think you'll repatriate from the captive this year?
I think, Michael, I think a safe assumption is probably USD 10 million. I think it could be higher than that based on performance over the first 6 months of the year. But I think USD 10 million is a safe assumption.
The next question is from Tal Woolley from National Bank.
I just wanted to talk again a bit about the LHINs and what's going on there. I mean, it does seem like the Port government's moving towards a more centralized theory of management, so to speak. And I'm wondering if as one of the largest providers in the province, if a push towards more centralized service delivery is something you think will really benefit you under a new regime because you are one of the largest providers, both in long-term care and in-home health care?
Tal, I'd love to say yes to that. But the honest truth is, we're parsing the tea leaves just like everyone else. And it's hard to discern exactly how this will play out. So just going back to what I said in my prepared remarks, we talked about transfer, assignment or reissue of our contracts with the LHINs to Ontario Health or its assigns. So -- and thinking about what its assigns could mean, there's also been this announcement about the concept of local Ontario health teams, and these are, at this point, highly ill-defined. I mean, they're aspirational constructs at this point. But if I were speculating, they are meant to provide integrated care between the hospital, the community long-term care, et cetera. It is likely that most of these will be centered around a hospital just because of the strength of hospitals in many communities. So -- and in terms of numbers, people are throwing around numbers like 20 to 30 across the province. So what this could mean is that we need to develop relationships with hospitals to provide home care that's very closely integrated with their programs. And that could mean that rather than having 14 customers like we do today, we could have closer to double that in terms of working with our hospitals. And this is where some of the integrated aspect comes in, in terms of what Extendicare can do. Because we already have contracts with many hospitals where we're running their long-term care facilities that are attached to them. So they already look to us for service provision. And so we're exploring whether we can work with those same customers of ours to create these Ontario health teams. The problem is nobody knows what the criteria are for an Ontario health team, how it gets funded. And I suspect that the system is going to be very focused on combining these health agencies and LHINs into this agency Ontario Health, which could take 1 or 2 years. So we really don't know how fast this is going to happen. So we're -- we're going to make sure that we're exploiting our advantages. I think our advantage is more about the fact that we operate from home care, long-term care, we have the assist group that has these hospital contracts as opposed to our size. But who knows, perhaps, it will be both. Perhaps there will be some province-wide contracts to backstop these Ontario health teams. We're just not sure how that's going to play out.
So there's only a couple of minor details, then.
I'm afraid so. I'm afraid so, but we're following it closely.
I guess my next question is just on the work you're doing inside ParaMed. As this reformatting in Ontario takes place over the next couple of years, none of the benefits that you expect to accrue from the technology work would get derailed by any of the changes you think that are going to happen in Ontario, right? Like, this is all mostly internal work, you think that will -- you'll retain the benefits regardless of the regulatory regime?
Yes. So yes, I think our ability to be agile with work assignments, our system also has clinical record capability, which we've interfaced now with several of the LHINs that we can provide electronic clinical reports that the nurses actually compile right in the patient's home because they're using a tablet format that they are carrying with them. They are entering that information, it's automatically uploaded into the LHIN. So it will provide us with a lot of versatility in terms of meeting the needs of these integrated health teams, as they're being described. The other thing that I just think gives some protection is that this system is used by 70% of the home care providers in Canada. So I think that gives all of us that are using it a certain amount of protection because there's the de facto standard in the market, which any hospital or other care provider could integrate with. So I think we're very well protected by being in good company with others across the market using the same platform.
Okay. And then just finally, any discussion or -- in terms of like when you are speaking with the government or confirms around sort of like the annual accommodation rate review. I think that normally happens -- I think it's July, if I recall correctly, but you're sort of anticipating that should pass as it normally has despite some of the changes that are going right now?
I'd say the short answer is yes. I don't think there has been any dialogue, concern raised. We would expect that to happen normally in due course, July 1.
The next question is from Yash Sankpal from Laurentian Bank.
On your home care margins, I just want to focus for this quarter, Q4. What -- if you removed the IT expenses and other onetime items, what would be the margin?
Yash, it's Elaine. If -- for the quarter, if you remove those items that we isolated as related to the implementation, it would take the margin from 7.3% to 7.7%.
Got it, okay. So it was not a big impact. It was mainly from the turnover, I guess?
It was mainly from the incremental staffing comments that Michael shared with you earlier. Yes.
Got it, okay. And just want to focus again on the development yields. What is your threshold right now, when you are considering the project? Like generally, what is the range you want to achieve?
We'd like to see that at a minimum, exceeding our cost of capital. So as long as they are in excess of cost of capital, we'll bring them forward, and we'll look at them for consideration.
And may I ask how you guys define your cost of capital.
It's in the range of 6% to 6.5%.
Okay. So anything above that would be at least in the first...
It would pass the first test, I think is a fair way to look at it, Yash, yes. That's not to say that we wouldn't look at others for specific reasons. But that's generally our view, at greater than our cost of capital.
All right. And just one more question on your impairment charge. So when I look at your leasing portfolio -- lease-up portfolio, the occupancy seems to be going up at a good comfortable rate. So I was a little bit surprised to see that you took that charge. So I would like to understand what was the rationale? And how big is the charge in terms of the original purchase price? If you could provide some color around that, that will be great.
Sure. So when you look at the full lease-up portfolio, there's a mixture of communities in there, and that's why you're seeing -- you're seeing some good progress because it has our Douglas Crossing Uxbridge community in there. The Saskatchewan portfolio that the charge relates to, 2 of those communities have had some growth in occupancy, but I think we're of the view that if -- the growth rate on those is limited beyond where it is today. So when we look at the portfolio that we've taken the charge on, 3 of the 4 Saskatchewan communities, it's about 27% of the original cost, I think was the question that you were asking, is what's driven the impairment charge.
The next question is from Chris Couprie from CIBC.
I'm just kind of following up on what Yash was saying. If you -- how should we think about the margin profile of Saskatchewan versus your Ontario properties?
Are you -- the NOI margins?
Yes.
Just one second -- just -- not the yield, you want the actual margins. Let me just pull it out for you, Chris, if you have got another question? I don't have those right in front of me, but I'll put them up.
Yes, I guess basically the direction flowing in, the same-property NOI margin has not really picked up yet to that what we had thought it would?
Yes. So I got it, Chris. So the NOI margin of those 3 communities in Saskatchewan that's a charge relates to was at about 21% NOI margin compared to our -- the rest of our retirement community portfolio, which in aggregate is closer to between 35% and 40%.
Okay, got it. Turning to some of the development questions. So you've given growth Capex guidance of $50 million to $55 million this year. I'm guessing $25 million of that is related to completing the Barrie development. Just can you talk to what the other spending is on? And then with respect to the Lynde Creek property, I think it's 3.7 acres. How many suites do you think you could potentially build on that property?
So I can take the first part of that question right now. The rest of our growth Capex spending is us getting started on some of those long-term care developments. So there's an expectation that we'll get in the ground on Sudbury, Stittsville and there would be some little bit of pre-spending on some of the other, priority one. So that's where the bulk of the rest of it is. As far as suite count on the Lynde community, I'm not sure. We can get back to you on that. I don't know what the -- we're very early on in the planning of that. So I think it's yet to be determined.
Yes, I think that's why we're talking about acres as opposed to suites. We're as much as driven in that situation by what's our market assessment as to what's the available land. So we haven't made a determination yet as to what size of development we're going to pursue there.
And just maybe the last question. So in terms of labor force on the ParaMed side. Just getting the idea of sequentially, how many more hires were there on the FTE side?
Well, I can say that on the back office front, schedulers, et cetera, that between Q4 of 2017 and Q4 of 2018, we added 120 people across our different offices. So there's significant addition in scheduling capability. And we'll grow into that and optimize that over the next, I'd say, 4 or 5 quarters.
The next question is from Doug Loe from Echelon Wealth Partners.
Just a quick follow-up question for me. Focusing on home care as everybody else is. Just wondering if one of the ways that you could grow the business would be to sort of to develop expertise in higher acuity services, say, infusion services or respiratory care, pain management, just to pick 3 off the top of my head. So just wondered if there might be a trend in the industry within your business to perhaps look at a way to expand margins through providing higher acuity services? And is that something that the industry or you are thinking about longer term?
I love the question, Doug. I'm smiling from ear to ear, because that's something that we've been talking about quite a bit. But I'll say that it was our very deliberate decision to get the basics right first before we start the kind of moving into more of complex services, because the more we specialize, the more you create more complex scheduling challenges in this kind of space. But having said that, Extendicare has already done some of this. This would not be new for us. We've done things like specialization in palliative care, specializing in certain areas of diabetes care. And this also applies in long-term care, where we've created the ability to handle dialysis and long-term care. So it is an opportunity for sure to offer higher-end services at higher per diems or per hour rates and expand margins. So we see that as being a very important part of our future in terms of developing new lines of business and differentiating ourselves from, let's call it, the rest of the commodity market.
Good. And I mean any feedback from government payers or clients just in terms of whether the payer reimbursement market is receptive to that shift?
They're very receptive. I have had numerous conversations with governments and LHINs on this. But probably -- and just tying together some of the things we've talked about this morning, probably, the most interested party are the hospitals. Because a lot of the people that are blocking hospital beds, these patients that I refer to as alternate level of care, because they don't need the acute care hospital anymore. But nobody is capable of taking them on, that they have special needs, they can't be managed in your standard long-term care or home care environment. And that's people who need dialysis, who need oxygen, who need IV therapy on a regular basis, palliative care is another example. So the hospitals are very interested in developing these kinds of specialized services. So I am anticipating as we move to Ontario health teams that, that will be the opportunity to introduce the specialized services and partnership with the hospitals.
The next question is from Tal Woolley from National Bank.
Just one quick follow-up, I'm sorry if I missed this in the presentation. But on Page 7, where you're showing your occupancy for retirement living. You're showing in the lease-up portfolio a decline in the January 31, '19, the occupancy rate, is that correct? Or...
Yes, that is correct. I mean, that's coming in because Bolton opened in January. So you add 112 suites to the denominator and all of sudden, it falls off. The remaining properties in lease-up are continuing to rise, but it's just because we added in essentially an empty facility early on. Lease-up in Bolton is actually going very well, and you'll see that coming back up again. So every time we add volume, like what will happen in future quarters now, you'll see that number rising steadily until we open Barrie, and then it will take a big saw-tooth down again. Okay?
The last question is from Yash Sankpal from Laurentian Bank.
I just wanted to follow up on the third-party management business growth that you talked about. So just wanted to see if you could add some more color around that like what opportunities you are seeing? And where you think you can be, say, over the next 2 years?
Sure. So we've got 2 businesses there, essentially. One is that other owners pay us to run their facilities, either retirement or long-term care homes, or the group purchasing, which we purchased as you can see, now on behalf of closing on 60,000 different beds. So given the regulatory environment in Canada that is making it harder and harder to be an independent operator in this space because you have to meet so many requirements, you have to demonstrate things like medication, safety, you have to provide statistics, et cetera. You have to have the right information systems, you have to pass accreditations, you have to have the all the right policy documents, training capabilities. That is very hard to do as an independent facility. So we're seeing more and more homes coming to us to manage their operations. When you become part of Extendicare Assist, you get access to our information systems, our training, our management capabilities, et cetera. So we're seeing a lot of opportunity there. The other thing that's just new, we just signed our first contract, is to help people with doing a new long-term care development or an expansion or a C-bed redevelopment, where again, it takes a lot to navigate the regulatory and licensing process to get those things done. Not to mention, economies of scale, on design and that sort of thing. So we've got a contract with University Health Network to help them with their redevelopment, and there's -- we see more opportunities like that coming along. That's why it's so significant that Elaine is taking on this new portfolio in Corporate Development because we just see huge growth opportunity in this space, if the government is serious about in Ontario alone building 30,000 beds in the next 10 years, we think the services business is going to be a real growth opportunity.
There are no further questions registered at this time. I would now like to turn the meeting back to Jillian Fountain.
Thank you, Lauren. That concludes the call for today. This presentation is available on our website as are the call-in numbers for an archived recording. Please don't hesitate to give us a call if you have any further questions. Thank you, again, for joining us, and goodbye. Have a good weekend.