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. 2020 Fourth Quarter and Year-end Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Jillian Fountain, Vice President, Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to Extendicare's Fourth Quarter and Year-end 2020 Results Conference Call. With me today is Extendicare's President and CEO, Michael Guerriere; and Senior Vice President and CFO, David Bacon. Our fourth quarter and year-end 2020 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 advance themselves. A replay of the call will be available later this afternoon until March 12. The replay numbers and passcodes 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. 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, everyone. Before we get to our fourth quarter results, I will take a few moments to provide an update on our activities related to the pandemic. COVID-19 continues to impact our country, communities and families. The immense toll taken by the virus on those in our care, their families and our courageous care teams who have been on the front line throughout the pandemic, has been relentless in recent months. Our staff have continued to work tirelessly to care for and support our residential clients, and I thank each of them for their selfless commitment and ongoing effort. As the second wave of COVID-19 infections drove increased case numbers across Canada in the fourth quarter and into 2021, we saw a dramatic increase in cases among our residents, clients and staff. Throughout this time, we took every measure possible to protect our communities from these higher infection levels with regular testing, increased staffing levels and enhanced infection protocols. As well, we assembled a team of specialized managers to provide rapid and effective assistance to homes experiencing COVID-19 outbreaks. We also reached out to regional hospitals and health authorities to solicit help for those homes that were overwhelmed by the virus during the second wave. Despite the exceptional efforts of our staff and partners, community spread of COVID-19 during the second wave resulted in further loss of life among our residents and staff. This tragedy has affected many families in the communities that we serve, and the enormity of their loss will remain with us for many years to come. We offer our heartfelt condolences to those who have lost a loved one during the pandemic. Fortunately, with decline in case rates in the community, the impact of the second wave in long-term care seems to be waning. As of February 24, 8 of our 69 long-term care homes and retirement communities remained in outbreak with active cases. Though in all of these homes combined, there are only 3 residents who have an active infection. We also continue to work closely with our Extendicare Assist clients to help them manage the outbreaks that remain in their homes. We are also encouraged by 2 significant developments in our fight against the virus, notably the availability of vaccines and expanded testing protocols. We've made significant progress in vaccinating our residents. As of February 24, approximately 91% of our long-term care residents and 33% of our long-term care staff had received the first dose of the vaccine, and approximately 65% of our long-term care residents have received their second dose. In respect of our retirement communities, 71% of residents and 33% of staff have received the first dose. Vaccination of home health care staff has also started this week. Limited vaccine supply across Canada in recent weeks slowed our staff vaccinations. But with the new supplies arriving, we are seeing clinics ramping up again. Fortunately, our staff continue to receive priority access. We are actively removing barriers for staff to get the vaccine, including compensating them for their time and travel expenses incurred to visit a vaccination clinic. Testing has and will continue to be an integral part of our strategy to prevent COVID-19 from entering our homes. Following our recent successful pilot of on-site antigen testing in a number of Ontario long-term care homes, we are in the process of deploying this technology in all of our homes across the country by the end of March. Point-of-care testing takes our screening process to the next level by providing each home with the ability to test staff multiple times per week and to test all visitors to a home. Instant access to test results enhances the speed and efficiency of identifying COVID-19 cases, allowing us to send them home to self-isolate, thus minimizing any chance of exposure to residents and staff. Governments continue to be very supportive of our COVID-19 prevention efforts. During the fourth quarter, we received additional funding in our long-term care segment from various provinces that offset a portion of our COVID-related costs. Subsequent to year-end, the government of Ontario made additional funding announcements to support the sector for COVID costs, some of which related to unfunded costs incurred last year, further demonstrating the province's ongoing commitment to help the sector address the pandemic. With that, let's turn to some fourth quarter highlights, starting on Slide 4. As with the past few quarters, our results continue to be impacted by COVID-19, with reduced occupancy in our long-term care and retirement segments, increased net COVID costs and lower volumes in our home health care operations compared to pre-pandemic levels. Our cost of combating the pandemic totaled close to $75 million in 2020, exceeding related government funding by $30.1 million. Pandemic-related costs in excess of funding totaled $10.3 million in Q4 as the higher level of community spread during the second wave led to more outbreaks in our homes, driving up COVID costs as compared to Q3. As we indicated last quarter, revenue declines in our home health care segment on a year-over-year basis qualified our ParaMed subsidiary to receive additional funding under the Canada Emergency Wage Subsidy program, totaling $40.4 million this quarter. In Q4, we invested $6.1 million in people, technology and training in our home health care segment. While these onetime investments impacted the Q4 results for home health, they support our focus on rebuilding our staffing capacity to accelerate the pace of recovery in our ParaMed volumes. David will go into the financial results in more detail later in the call. Note that the timing of COVID-related costs and revenues is likely to cause continued volatility in our results until the pandemic is over. Turning now to Slide 5 and long-term care redevelopment. The critical shortage of long-term care beds and pressing need for replacement of old homes has been highlighted by the COVID-19 pandemic. Older homes have experienced some of the most significant outbreaks given their smaller rooms, aging ventilation systems and 4-bed ward room configurations. Older homes that were situated in regions with high rates of community spread of the virus experienced some of the most challenging outbreaks during the first and second waves of the pandemic. The Ontario government's announcement of a new capital funding program in the third quarter of 2020 was aimed at addressing both the need to replace these older homes and to increase long-term care capacity across the province to address growing waiting lists. We had advocated for many years, along with our sector partners and industry associations, for a new capital program to support the redevelopment of these older homes. So it was gratifying to see the new program announced last year. We were thrilled to break ground on our first project under this new program in Sudbury in Q4. We anticipate having a total of 6 long-term care redevelopment projects underway by the end of 2022, representing a total investment of over $400 million. In total, we have submitted applications for 22 projects with the Ontario government that would result in the construction of more than 4,200 beds. And of which, 3,285 would be C bed replacements, and 900 beds would be net new to our Ontario portfolio. We continue to work closely with our industry partners and the government to address affordability issues in certain geographic regions and to streamline related approval and licensing processes to be able to complete as many of these projects as possible. The Sudbury home will have 256 beds and will replace our 234-bed Extendicare Falconbridge Class C home. Our total investment for this home is expected to be $62.3 million. In addition, we are in the final approval stages for a new 192-bed home in Kingston, which we plan to start construction next quarter. That project will replace our existing 150-bed Class C home in Kingston. We are targeting to start construction on a third long-term care project before the end of this year. Moving to Slide 6 and our long-term care operations. COVID-19 continued to impact our operation in Q4 as occupancy levels continued to decline as a result of admissions, restrictions and costs to protect residents and staff exceeded the COVID funding that has been announced thus far. Occupancy levels at our long-term care homes declined to 87.7%, down from 97.8% in the same quarter last year, and a further decline from the 90% recorded in Q3 of 2020. Despite lower occupancy levels, our revenue base was largely preserved as governments continue to recognize the challenges associated with new admissions during the pandemic. In Ontario, the government has provided basic occupancy protection funding until March 31. Funding announcements from the Ontario government subsequent to year-end included an additional $398 million of COVID-related funding for the sector for 2020 and the first quarter of 2021. In addition, the government indicated their intention to provide additional funding for the balance of 2021 to offset COVID costs. The timing and quantum of the additional funding is not known at this time. In a further example of its commitment to the long-term care sector, the government of Ontario released its long-term care staffing plan in December 2020, which outlined its intention to increase the hours of direct care to long-term care residents to 4 hours a day per resident, an estimated 25% increase in the size of the current staff complement by [ '24, '25 ]. The plan also includes provisions to fund education and recruitment programs to hire the caregivers needed to meet the higher care hours commitment. It also proposes improvements to oversight and guidance for medical outcomes and increased transparency and measurement of performance in this sector. We fully support the plan and welcome the proposed legislative changes to support this important initiative to provide higher quality care for our residents and their families. Turning to Slide 7. Our ParaMed volumes continue to recover from the impact of COVID-19 as our average daily volumes grew in Q4. Nevertheless, they remain below pre-COVID levels. Referrals and average daily volumes have improved since the impact of COVID-19 peaked in April of 2020. Referrals have now recovered to pre-COVID levels. However, workforce capacity limitations have kept our volumes from recovering at the same pace. Q4 volumes are up 5.2% from Q3 levels, and we have continued to see further improvements since the year-end, with our average daily volume for the 4 weeks ending February 14 up 1.6% from Q4. Recent lockdown measures, particularly prolonged school closures in certain regions, impacted the ability of some of our frontline caregivers in our home health care segment to work, which slowed the pace of recovery in our volumes. To meet the continued growth in demand for home health care services, we are making long-term investments in training to address the chronic shortage of health care workers. We made $6.1 million in strategic investments in people, technology and training in our home health care segment in Q4. These investments included a wage harmonization and enhancement program for nonunionized frontline workers, which simplified a multiplicity of wage and travel policies, and increased our market competitiveness in certain geographies. In addition, we made targeted investments in technology and in our new in-house and college partnership training programs announced in Q3. To date, these programs have graduated approximately 300 new caregivers, and we expect the capacity of these programs to increase to more than 600 trainees in 2021. As the pandemic recedes, volume growth and margin improvements will result from the transformation investments we made in recent years. The home health care market continues to expand at 4% per year driven by aging demographics. We believe we are well positioned to exceed the growth of the market as we emerge from the pandemic and address the related workforce capacity shortage. Increased volumes and efficiencies derived from our people and technology investments will drive improved margins as we grow. I will now turn to David Bacon, our Chief Financial Officer, to provide insight into our consolidated and segmented financial results for the fourth quarter. David?
Thanks, Michael. I'll start by providing an overview of our consolidated results for the fourth quarter, followed by some financial highlights of our individual business segments and our liquidity position. As Michael mentioned, we continue to experience a high level of volatility in our financial results due to the impact of COVID-19. Our pandemic costs this quarter were higher than expected due to the magnitude of the second wave. Details of our net COVID costs by business segment are outlined on Slide 18 of our presentation. In Q4, we continued to experience occupancy pressures in our long-term care and retirement segments and lower volumes in our home health care segment as compared to our pre-pandemic levels. As previously noted, ParaMed received $40.4 million in Q4 under the federal government's Canada Emergency Wage Subsidy program. And consistent with Q3, the subsidy is recorded as a reduction of operating expenses of our home health care business. Consistent with our prior presentations, we exclude certain factors related to our home health care operations when discussing the results of this segment, namely the impact of the wage subsidy in 2020, the B.C. business that we exited in January of 2020 and the incremental funding from Bill 148 we received in the second quarter of 2019. The details of these factors are outlined on Slide 19 of our presentation. Turning now to Slide 9, our consolidated results for the fourth quarter. We continue to incur COVID costs in excess of funding, which we estimate totaled approximately $10.3 million in the fourth quarter at the adjusted EBITDA level. Excluding the factors impacting comparability related to ParaMed that I noted, our consolidated revenue in the fourth quarter increased by 10.9% or $30.1 million to $307.7 million driven by COVID-related funding of $32 million to offset, in part, the $41.6 million of COVID-related expenses we incurred in the quarter. Revenue also increased as a result of LTC funding enhancements and growth in our retirement living and other operations, partially offset by lower home health care average daily volumes, timing of long-term care, both through funding and lower preferred accommodation revenue in the long-term care operations. Consolidated NOI declined 53% to $15.4 million compared to Q4 2019, reflecting increased cost of COVID in excess of funding, lower volume and the impact of $6.1 million in nonrecurring people, technology and training investments in our home health care operations and increased cost of resident care and lower preferred accommodation revenue at our LTC operations. This was partially offset by growth in the retirement living and other operations segments. Our consolidated NOI margins declined to 5% from 11.8% in Q4 of 2019. Excluding the Q4 impact of our estimated net COVID cost of $10.3 million and the $6.1 million in onetime investments in our home health care segment, our consolidated NOI margins were 11.3% for the quarter. Our reported consolidated adjusted EBITDA was up 74.5% or $17.5 million compared to Q4 2019 due to the impact of the ParaMed wage subsidy, offset by net COVID costs, the declines in volumes in our home health care segment and increased administrative costs. Our reported AFFO was up 91.9% or $10.4 million compared to Q4 2019 due to the higher NOI, offset by higher maintenance, capital expenditures and income taxes in Q4. Our quarterly results continue to be volatile, and the estimated basic AFFO per share impact of some of the more significant items impacting our Q4 results include our net COVID costs of $10.3 million or $0.08 per share, our ParaMed wage subsidy of $40.4 million or $0.33 a share and the onetime investment in our home health care segment of $6.1 million or $0.05 per share. Turning now to our individual business segments and on Slide 10. Our long-term care operations in the fourth quarter saw revenue grow by $25.5 million or 15.3% to $192.1 million, which included COVID funding of $25.6 million, partially offset by lower preferred accommodation revenue due to the impact of COVID. NOI decreased by $11.3 million or 54.9% to $9.2 million, and NOI margins were down to 4.8% from 12.3% as the estimated costs associated with COVID were $8.7 million in excess of our government funding. Our Q4 2019 results were impacted by favorable labor accrual adjustments of $1.4 million. Excluding these factors, our LTC NOI this quarter was lowered by $1.2 million, largely impacted by higher labor costs and lower preferred accommodation revenue. And our LTC NOI margins in Q4, excluding the impacts of COVID, were 10.8%. Overall, long-term care occupancy in the quarter was down to 87.7% due to the impact of COVID, primarily driven by occupancy decreases in Ontario where our basic accommodation revenue has been protected to date. While this funding is extremely important during these challenging times, it does not compensate for the loss of preferred accommodation premiums. As Michael mentioned, at the beginning of January, the Ontario government announced additional COVID funding to the end of March of 2021, a portion of which is to cover costs incurred in 2020. Thus far, we have received $6.6 million related to 2020 that will be booked in Q1 of '21. Furthermore, this week, the Ontario government announced the extension of the occupancy funding protection through to March 31 of '21 and indicated its intentions to continue to provide COVID prevention and containment funding support into the government's 2021, '22 fiscal year. We believe these announcements are a positive indication that we will continue to receive additional funding towards our pandemic costs, both for the net costs incurred in 2020 and into '21. However, the quantum and timing is difficult to predict and will result in continued volatility in our financial results in '21. Turning to Slide 11 and our home health care segment. Excluding the impact of wage subsidies and the prior year impact of the B.C. contracts and Bill 148 funding, NOI declined by $7.5 million to a loss of $1.7 million compared to Q4 of 2019. NOI decreased in the quarter largely as a result of the onetime investments totaling $6.1 million that Michael discussed earlier. Excluding these items, NOI declined by $1.4 million compared to Q4 2019, largely due to a 5.4% decline in volumes, increased workers' compensation and benefits costs and COVID costs in excess of pandemic pay programs of $800,000, partially offset by lower costs related to the transformation project. Our NOI margin in Q4 '21, excluding -- in Q4 of 2020, excluding the onetime investments in our net COVID costs, was 5.8%, an improvement from Q3 '20. Average daily volumes in the fourth quarter were 5.4% lower than the same quarter last year but improved sequentially by 5.2% from the third quarter of 2020 and continue to recover subsequent to year-end, as Michael noted earlier. Volume recovery in Q4 was impacted by seasonal softness in December and the implementation of further COVID lockdown measures that continue to put pressure on our workforce capacity. Turning to retirement living operations on Slide 12. We are pleased with the performance of our retirement operations despite the impact of COVID on our occupancy levels and costs. Our Esprit homes are situated in smaller markets, and our stabilized occupancy has performed well, averaging 91.3% in the fourth quarter, down 60 basis points from Q3. Occupancy levels in the fourth quarter were impacted as in-person tour restrictions were reinstated in certain markets in Ontario during the quarter, resulting in stabilized occupancy of 90.7% as at December 30, 2020. Subsequent to year-end, we have seen some marginal improvement in occupancy levels with a stabilized occupancy up 50 basis points to 91.2% as at January 31, 2021. Q4 NOI increased by 11% to $3.3 million over the prior year driven by increased occupancy in our lease-up communities, which includes the opening of our Barrieview retirement community from Q4 of 2019. The positive impact of improved lease-up occupancy was partially offset by lower same-store occupancy levels and our increased costs associated with COVID. Despite the increased costs, the improved lease-up activity contributed to an NOI margin of 27.6%, up from 26.4% in Q4 of 2019. Turning to our final business segment on Slide 13. Our Assist contract services and SGP group purchasing services continue to perform strongly with its consistent growth in revenue and NOI of over 9% on a cumulative average growth basis over the past 8 quarters. The underlying demand for our services remains strong. SGP, together with its partners, provided cost-effective products and services to 79,900 third-party residents as of January 31 of '21. NOI from our contract services, consulting and group purchasing operations continued to improve in the fourth quarter by 32.2% to $4.6 million over Q4 of 2019. Our improved performance year-over-year was due to growth of 21.9% and the clients served in our SGP division and lower travel marketing expenses due to COVID limitations. Finally, turning to Slide 14. We remain in a strong financial position. And at year-end, our consolidated cash and short-term investments on hand were $180 million, with $71 million in undrawn credit facilities, and no scheduled debt maturities until the first quarter of 2022. We intend to fund the construction of our redevelopment projects with our available liquidity initially and considering adding project-level construction financing as the timing of further redevelopments become clearer. The impact of ParaMed's wage subsidy received in 2020 positively impacted our debt metrics, with interest coverage improving to 4.7x and debt to gross book value improving to 45.9%. With that, I'll pass it to Michael for his closing remarks.
Thank you, David. Our primary focus continues to be on protecting our residents, clients and staff. My sincere thanks to our dedicated care teams for their selfless commitment to those in our care during the past year and to the hospitals and health authorities who assisted those homes that were overwhelmed by the virus during the second wave. We are also grateful to provincial governments for their assistance in providing pandemic support. We are particularly appreciative of the commitments made by the government of Ontario to build a stronger future for the long-term care sector with its new capital program to meet the need for new homes and its plan to increase hours of direct care for long-term care residents into the future. While hope has arrived in the form of vaccinations for our residents and staff and on-site antigen testing that provides immediate test results for staff and visitors, we will have to maintain our heightened vigilance to control the virus for some time yet. Nevertheless, the progress made in staffing, treatments, on-site testing and widespread vaccination of our residents and staff means we have dramatically reduced the risk to the vulnerable seniors in our care. With that, we'd be happy to take any questions you may have. Operator?
[Operator Instructions] The first question comes from Lorne Kalmar with TD Securities.
First question, I believe, recently, the government of Ontario announced that they're going to do a program to train up 6,000 PSWs. How does that sort of impact your training program you guys have put in place? And when do you think that the level of PSWs available gets to a point where you guys can actually start meeting the demand out there for the service?
Well, we were delighted with the announcement from the government on that front. And Lorne, you may have noticed a couple of days before that, there was a much smaller announcement where the government announced just over $4 million in funding for various programs, and there were 6 programs under that funding announcement, 3 of them were ours. So our activities will continue in parallel to the government's activities. They announced 6,000 new PSWs this year, which would be about 10 per home. And given that we're looking at increasing staffing by about 25% over the next 3 years, that's a good installment, but nowhere near everything we're going to need to be able to meet those new commitments. So I think we looked at it as a really positive development, something that will reduce barriers to people coming into the sector, but we're going to need everybody pulling in this direction to move this ahead. So we were really happy to see it, but we're not waiting for outside programs to provide us with the staff that we need. That's why we're also running our own partnership programs with colleges.
Got it. And just in terms of timing, like when do you guys think you'll get to the point where you can start sort of meeting the demand for the referrals and whatnot?
Well, we're seeing us closing the gap this year to a significant extent, but we won't close it all. So it's really a matter of continuing to grow our workforce and closing that gap with the referrals. We've been seeing the last couple of quarters, quarter-over-quarter growth of about 5%. A lot of that's fueled by people coming back to work. So I think we're going to settle into a growth rate that is in excess of the 4% per year, that the home health market is growing, so we'll be closing the gap. But I think it'll take us a couple of years to close that gap entirely is our current expectation.
Okay. And like, I believe last quarter, you guys mentioned that you're getting about 50 folks, 50 PSWs back per week or every 2 weeks. Is that still the pace? Or has it picked up at all?
Well, it actually slowed down, Lorne, over the peak of the second wave. I mean it really peaked through December and January. And during that time, when the schools locked down, we saw a pause in people coming back to work. We were actually quite concerned that we would see a lot of people. We didn't see that, thank goodness. We are able to maintain the gains, but we didn't see people coming back during that couple of months period. But now that the students have gone back to class, we've resumed growing again as we came into February. So it's a little too early to answer that question. I think through December and January, we saw a pause, and we'll see how things recover now coming into February and March. But our expectation is that we'll get back to that same pace that we were seeing before.
Okay. And I guess sticking with the ParaMed, I guess being almost or 2/3 of the way through Q1, any other big onetime costs you guys are expecting in the quarter? Or was that sort of a Q4 event and now we're sort of back to business-as-usual obviously with the pandemic as the exception?
Very much back to business-as-usual. We don't expect any extraordinary expenditures in -- none are planned at this point.
Okay. Great. And then one last one, I'll turn it back. Any idea of the CEWS payment you guys would expect to get in either Q1 or Q2?
Yes. Lorne, it's David. We -- I mean, truthfully, we're hoping that we don't have any CEWS in Q2 because that's a signal that -- from a volume perspective that year-over-year recovery is there. We will have some modest amounts on a relative basis in Q1. We're 2/3 of the way -- almost 2/3 of the way through. So something in the range of $6 million to $9 million maybe for all of Q1, but that is dependent on how volumes look in the final sort of month and a bit here of the quarter, but we're expecting that really to wind itself down as we grow our capacity and recover on our volumes.
The next question comes from Pammi Bir with RBC Capital Markets.
Great to see the progress on vaccinations and the rapid testing that I guess you'll be rolling out. And just on that, maybe can you perhaps frame the potential costs associated with that? And how quickly can that program be rolled out across the portfolio?
Sure. Thanks, Pammi. So we're planning to have that rolled out to all of our homes by the end of March. So we're moving quite rapidly to put that in place. The cost will be -- is really just staff costs because the tests are provided at no cost to us. So it's just the cost of our staff conducting those tests inside the homes. And on average, we'll need about 2 full-time equivalents per home to run the program. But it is important to note that those are incremental COVID costs that are eligible for government reimbursement. We have no assurance that all of our costs will be completely covered, but we do expect a significant portion of that cost will be reimbursed. So on a net basis, we don't think it's going to impact NOI.
Got it. I guess just on that point with respect to the vaccinations overall, at what point do you think you'll have all residents and staff vaccinated? Is that something that's possible by the end of this quarter? Obviously, there have been some delays with respect to just the supply of the vaccines, but I'm just curious if -- how you see that trending.
That's our objective, to have all staff and residents in long-term care and retirement vaccinated by the end of the quarter. The home care side has just got started. So we're not really in a position to project how long that will take at this point. But certainly, on the long-term care side, we'd like to be substantially through first dose for everybody by the end of the quarter. Some of the second doses for staff will go into Q2. But as we've seen from the international data, even a single dose is proving to be very protective. So we're thinking by the end of the quarter, we'll have a fairly good degree of protection in place, but we're not entirely depending on the vaccine. The testing -- the point-of-care testing program is really important as well. And it's really our kind of extra vigilance to make sure that we're not exposed to variable immunity caused by variants of concern or those kinds of issues. So we're really putting on -- pushing both of those programs to get double protection across all of our homes.
It's great to hear. I guess along the same lines here, I guess, thinking about the unfunded pandemic expenses, if you can get through the end of Q1 with, I guess, the target of getting most of the vaccinations done, how do you see the unfunded pandemic costs trending over the next few quarters? Because I suspect, like some of your peers, some of those costs will continue for some time until perhaps, I guess, the general population is vaccinated. Just any color you can share there would be helpful.
Yes. So a couple of things to just consider on that front. First of all, outbreaks drive costs in a major way. So they drive excess cost. They drive additional staff in the form of use of agencies. They drive much higher PPE use, which is very costly. So our costs are going to be strongly affected by the number of outbreaks we're experiencing. And that number is waning significantly. So our costs will track down as the number of outbreaks tracks down. Now we're hopeful that the new protections that we're putting in place are going to keep outbreaks to a minimum. So that'll have a positive impact on costs. But that said, our increased vigilance, the testing program, we are maintaining higher staffing levels across all of our homes to be ready. It's going to keep us at a higher cost structure at least through Q2, and then we'll see how things are going with respect to pandemic control in the community as well. The other thing to note is I talked about the government's announcement in December about moving to 4 hours of care across all of long-term care, and that involves adding about 25% to the staffing complement over a 3-year period. So that program is supposed to start as of April 1. So we haven't seen any detailed announcements about how that will be implemented. But you heard the announcement about the 6,000 new PSWs being trained. And the thought is that the government will start to provide some of that sort of the first tranche of that additional funding to increase the hours of care, starting in the government's new fiscal year in April. Now we have no assurance that, that's the case, but it may be that some of those increased pandemic costs just turn into higher staffing levels for all of our homes and that it becomes funded permanently. So there's a lot of uncertainty around how that will happen. And I expect that over the next 2 months, and once we see the Ontario budget coming down, we'll get more clarity on that.
Got it. I guess just to that point, presumably, the increased labor requirements or direct hours of care would be funded. I mean you're not working under the assumption that they would not be funded, I take it.
No, absolutely. When they made the announcement of their strategy in December, it included an overall projection of the increased funding that would come to the sector. So while they didn't announce the details of the funding, they did put a price tag on it. So it will definitely be a funded initiative, and that fits with the way that long-term care funding is provided because all of the care activities are in the flow-through envelopes. So it would make sense that those would be funded activities.
Just one last one for me. I guess with respect to, I guess, the class action that was certified in September, can you just provide some color on that proceeding? And would that be covered by Bill 218 or -- because it seemed like that was prior to COVID?
Yes. It's unrelated to COVID. There was a lapse in sterilization technique for equipment in the London area that was discovered and has been remedied. But as part of that, we wrote to all of the people that we treated during that period of time to indicate that there might be a heightened risk of infection as a result of that lapse. And we wrote to all of our clients, there have been no examples of any transmission of any infection as a result of that. So the class action is related to the mental anguish that people experienced on receiving that letter, indicating that they may have been exposed to an infectious agent. So that class action, as you've mentioned, has been certified, and we'll move forward. But our -- we'll certainly defend our actions. And certainly, we erred on the side of transparency in terms of making sure everybody knew of the potential exposure. So we feel that we're in a very good position on that particular class.
I guess -- sorry to just keep going. Just the last one on -- would that be -- if successful, would that be covered by insurance?
Yes.
The next question comes from Tal Woolley with National Bank Financial.
Michael, I was just wondering if you could speak a bit to the Ontario government's commissioning of the recommendations that are expected to come out on April 30. The extended period appeared before the commission. Do you have a sense of what other type of recommendations might be coming out once that report is released?
Tal, if I knew that, I would probably be in a different profession. So not really certain what to expect there. I think the government has already responded to some of the systemic weaknesses in the sector that have been exposed by the pandemic. In my view, the government has been very proactive about it. So I'm not sure what else to expect. There may be some focus on capacity issues in the sector. We haven't seen any comment on that. There may be more from a regulatory oversight perspective. But otherwise -- I'm just speculating, Tal. I can't really predict what they'll come out with.
That's fair. I totally understand, just thought I would ask. Just on the long-term care redevelopment. So if the government starts to more aggressively advance these projects, do you get a sense like -- around the industry, there's obviously a lot of small players who might be a bit capital constrained coming out of the pandemic. Do you think we're poised for maybe a little bit more consolidation in the long-term care sector over the next couple of years?
Yes. Tal, it's David. I think -- I mean that's -- there's a possibility of that for sure. I think that coming out of -- when we get through COVID and see the pandemic behind us, I agree. I think the smaller operators that have come out the other side and certainly live through the crisis and perhaps changes coming in the regulatory framework, the capital needed for redevelopment, some of the pressures that the smaller players are seeing on insurance coverages and things like that, it could lead to that. I think that what will be required, I think, from a -- to really create a consolidation wave will be some additional beds and additional funding announcements from the government in terms of the capital funding program, right? They have the 20,000 beds that are being allocated now and close to fully allocated. So -- and most of those are spoken for by the existing operators. So I think there'll be an appetite on behalf of perhaps some smaller operators to exit, but there'll need to be additional beds committed in the plan from the government to help sort of put those 2 things together.
Okay. And the Class C licenses, I think they all expire in 2025. I'm wondering if you've heard sort of from the government how they intend to sort of treat those licenses given that it doesn't look like we're going to get through everything we need to get through by 2025. Have they talked about an interim licensing solution? Because I know that can also affect like your ability to get financed and things like that.
Yes. Tal, I think I'd point to what they've done in the past with expiring licenses. There's still a number of the very old D beds in the system that expired last year, and the government issued a number of license extensions to those homes. I think they were 4-year license extensions. So they haven't announced anything with respect to the C bed license expiring in 2025 at this point, but I think past experience would suggest that they will provide the license extensions necessary to get those homes to the point of being redeveloped.
Okay. And then just lastly, as we sort of think longer term on the redevelopment of these beds, do you have a good number, like, for what we should be thinking as a budgeted cost per bed?
Yes. Tal, I think in Q3, we talked about our Sudbury project, which is a live project that's in construction. So I mean that's a good proxy. I think $275,000 to $300,000 a bed is numbers that we see in our numbers, and we know some of the other sector players see, I think, those. Right now, that's a good number to use as you contemplate sort of beds overall.
[Operator Instructions] The next question comes from Yash Sankpal with Laurentian Bank.
The $30 million of out-of-pocket costs you incurred in 2020, how much of that do you think or do you hope would be covered by the latest round of funding announced by the government?
Yes. Yes, I think, Yash, as we disclosed on the long-term care side, I think the unfunded costs on the long-term care side are about $24 million. So that's sort of the focus. And I think in Ontario, we've received $6.6 million after year-end that relates to 2020. The -- in the announcement that Ontario made back in January, there was about $268 million of that $398 million they had earmarked for COVID costs dating back to the beginning of the pandemic through to the end of March of '21. They've allocated about 40% of that, Yash. That sort of translates to the $6.6 million we're talking about. We expect that we'll allocate the rest hopefully within Q1. So we have some visibility on that. So that $6.6 million is about 40%. I don't have any view of the basis on the rest of the allocation. So hard to say. But -- so that would leave us with about $18 million left, and there's still potential for some more to come in to cover that. But it is difficult to say because there's a lot of moving parts, and they are trying to -- they are changing their allocation basis a little bit of this additional funding and -- but are showing us some indications we are trying to match the funding and allocations to the actual cost that the sector is incurring. So we just have to wait and see how that plays out through the balance of Q1 and into Q2.
Just in broader terms, what do they look at to allocate those funds to you, like how much costs actually incurred, or do they have a formula?
Yes. No, there's actual cost, Yash. The whole sector has been required to submit periodic statements of their -- of the COVID-related costs that they're incurring. So they've defined the categories, and they're the ones we talk about with you, increased staffing, infection protocol, PPE, et cetera. So the whole sector has been reporting our actual costs, the same costs we report on these calls. That's all been going in on a home-by-home level to the ministry through the pandemic.
Got it. Okay. And now given what you know and what you're seeing in the pipeline, do you think your long-term care operating margins have changed structurally?
So Yash, I think that -- I guess there's 2 ways to answer that. First of all on the -- in terms of the COVID costs and the effect of COVID, we don't see any permanent change in our margins post pandemic. So there's nothing that's changed our expectations on that front. We do think our staffing levels may change, as I mentioned earlier, but those would be funded. But that said, our redevelopment agenda will have a positive impact on our margins. But of course, that'll be a much longer-term kind of impact to roll out over the course of that multiyear program.
Right. Okay. That's a good segue. Now of the $400 million of investments you expect over the next 2 years, like, by 2022, how much of that -- do you have already sufficient equity to fund those projects? Or do you think you will be raising as times go?
I think, Yash, when we look out over the next couple of years, and that sort of 6 priority projects, I mean, the cost for those projects will actually be borne out over the next 3 to 4 years. We're going to start construction, hopefully, on those 6 by the end of next year, but the ones starting later in 2022 will take us into '23, '24 before they're finished. I think if you think of the current markets from a financing -- construction financing point of view, 75% loan-to-value is a target and certainly achievable from all the work we're doing with our lending partners. So the equity needs there are, say, $100 million on the $400 million. And if you recall in the new capital funding program, one of the key new features of it was to introduce the capital grant that gets paid on completion of the project. So those projects, the capital grant is going to range somewhere between 10% to 17% of the costs. So if you think of us needing 25% upfront through the construction period, but then having 10% to 17% of that -- of the total costs come back, our equity needs on a net basis are in that $50 million to $60 million range, and we think -- we've given our current liquidity position. We're in a good position to fund that off the balance sheet.
Okay. And just one last, do you have any expectation as to how much you actually will be spending this year on those projects?
Yes. I think in our MD&A, you'll find that we've got an outlook of about $60 million of growth capital in the current year.
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. Please don't hesitate to give us a call if you have any further questions. Thank you again, everyone, for joining us today, and have a good weekend. Goodbye.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.