Sienna Senior Living Inc
TSX:SIA
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Sienna Senior Living Inc
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Good day, ladies and gentlemen, and welcome to the Sienna Senior Living First Quarter 2018 Financial Results Conference Call. [Operator Instructions] I would now like to introduce your host for this conference call, Lois Cormack and Nitin Jain. You may begin.
Thank you. Good morning, everyone, and thank you for joining Sienna's Q1 2018 conference call. Please be aware that certain statements or information discussed today are forward-looking, and actual statements could differ materially. The company does not undertake to update any forward-looking statement or information. Please refer to the forward-looking information in Risk Factors section in the company's public filings, including its most recent MD&A for more information.You will also find a more fulsome discussion of the company's results in its MD&A and financial statements for the period, which are posted on SEDAR and can be found on our website, siennaliving.ca.Today's call is being recorded, and a replay will be available. Instructions for accessing the call are posted on the company's website, and the details are provided in the company's news release. The company has posted slides, which accompany the hosts' remarks on the company's website under Events and Presentation.With that, I will turn the call to Lois.
Thank you, Nitin. Well, good morning, everyone, and thank you for joining our Q1 call this morning. Guided by our mission of helping residents to live fully every day, we have made significant progress on Sienna's strategic priorities: growing the company, enhancing the operating platform and maintaining strong balance sheet.Moving on to the Q1 2018 highlights. The organization has continued to achieve strong operating results in Q1. Total net operating income grew by 18% from the prior year, which was driven by 5.5% growth in same-property retirement and a prior year tax recovery and 12.9% growth from acquisition. In the first quarter, Sienna diluted OFFO per share of $0.31 is up 2.7% from the prior year period. Sienna has continued to strengthen its balance sheet, and ended the quarter with a debt to gross book value of 50.3%. This is 210 basis points below the first quarter of 2017.During the quarter, DBRS confirmed the rating of Sienna's Series B Secured Debentures at A (low) with a stable trend. This is a very strong vote of confidence on the health and stability of the Long Term Care portfolio. Sienna's operations team continued to achieve consistent occupancy and retirement residences, finishing the quarter with overall average and as at occupancy at 92.6% despite the unusually aggressive flu season.As previously mentioned, the Baltic portfolio has been combined with Long Term Care to become Long Term Care/Residential Care segment, and this segment continues to enjoy very high occupancy. Q1 2018 average occupancy at 97.9%, and these levels are supported by significant demand and very long waiting lists.Quality and resident safety are our top priorities, and Sienna has continued to outperform both provincial and national averages on publicly reported quality indicators for the past 24 months. We also outperformed the provincial average on government's inspections, and 88% of Sienna's care communities are in the lowest risk ratings according to the Ontario Ministry of Health and Long Term Care. In addition, residents and family satisfaction has increased to 89%.Now moving on to Slide 9. We were thrilled to have completed the acquisition of Ten High-Quality Residences throughout Ontario. We are delighted to welcome the team members, who bring a depth of experience in retirement living. This investment expands Sienna's retirement footprint and expertise into new and desirable communities. It further enhances the company's growth profile, and drives long-term value creation for shareholders.We are now focused on fully integrating these new residences into the Sienna operating platform. Ontario's previously announced campus project in Keswick and North Bay are expected to begin construction in 2019. The Ministry of Health and Long-Term Care has begun to grant additional bed licenses. And as part of this program, Sienna has received additional licenses, which will help to support the feasibility of redevelopment projects in Scarborough and in Brantford. And we look forward to sharing more details of these projects in the future. The retrofit of Bloomington Cove Care Community, our signature domestic care home, is expected to be ready to welcome residences by the end of Q2 2018. And the expansion of Island Park Retirement Residence in Campbellford is progressing very well, and it is on track to be completed by the end of Q1 '19. I am very pleased to report that Sienna was added to the S&P/TSX Composite Index, effective March 19. This is a reflection of our team's success in executing the company's strategic growth strategy and shareholder value creation, and is a testament to the Sienna brand, our strong operating platform and our mission of helping residents to live fully every day.With that, I will turn it over to Nitin for further details on Sienna's financial results.
Thank you, Lois, and good morning, everyone. I'll start on Slide 13. Net operating income for the first quarter of 2018 was $32.4 million, which represents an increase of 18% or $4.9 million compared to the same period last year. The company's retirement division achieved strong organic growth, generating same-property NOI of $7.8 million, a growth of 5.5% or $0.4 million over Q1 2017. This was driven by year-over-year rent increases. Sienna same-property Long Term Care residential care NOI for Q1 2018, excluding prior year tax recovery adjustment, declined by 1.4% over the same period last year to $19.7 million. This was driven by the timing of expenses due to the Good Friday statutory holiday during the quarter, which last year fell in Q2 2017. On a full year basis, we expect Long Term Care residential care NOI to be consistent to prior year.In the first quarter of 2018, diluted OFFO per share of $0.31 is up 2.7% since the same period in 2017, and diluted AFFO per share of $0.35 for the quarter is in line with prior year. Per share metrics reflect the dilution impact of the tolling of the equity raise on February 9 and the over-allotment option exercise in February 22, whereas the Ontario portfolio acquisition was completed on March 28.Now moving to our financial position on Slide 15. Executing on Sienna's debt strategy at the end of Q1 2018, Sienna's debt to gross book value was 50.3%, which is 210 basis points below first quarter 2017 metrics. Sienna's debt coverage ratio has increased to 2x from 1.6x in the prior period. And Sienna ended the first quarter with approximately $86 million in undrawn credit lines and cash.During the quarter, Sienna announced that it has completed the portfolio acquisition of Ten High-Quality Retirement Residences in Ontario. The Sienna an $82 million acquisition, and related transaction costs were financed through a combination of $88.2 million in property level debt, $150 million acquisition term loan facility, net proceeds from the company's recent $184 million equity offering, and draws on the company's existing credit facilities. Subsequent to the quarter, Sienna announced its intention to exercise its right to redeem all of its 4.65 convertible debentures due on June 30, 2018. Currently, the outstanding amount of the debentures is approximately $44 million. Callers of the debentures have the right to convert into common shares at a conversion price of $16.75 per share prior to the end of market close on May 22, 2018. On a fully diluted basis, the company's debt to gross book value would represent 48.1%.Also, subsequent to the quarter, Sienna acquired an additional 16% interest in Glenmore Lodge that brings Sienna's total interest in this property to 77%. We're happy to continue to expand our ownership in this best-of-class residential care community in British Columbia. Glenmore Lodge opened over a year ago in Kelowna, B.C., housing 118 suites, with approximately 15% of the suites in private pay. Additional 16% interest was acquired for a purchase price of $6.3 million, using the company's available cash on hand and the assumption of the existing mortgage on the property.With that, I will turn the call back to Lois.
Thank you, Nitin. Looking ahead, we believe that the outlook for Sienna is very strong, and we expect to continue the program that we have made on our strategic priorities. We were delighted recently to welcome more than 1,100 residents and over 750 new team members at special events to celebrate our newest retirement acquisition. As with other recent acquisitions, Sienna will enjoy the benefits of its new team members' depth of experience, which will continue to strengthen the company's expertise in retirement living. We will further remain strategic and disciplined in our approach to acquisition, and believe that the tremendous efforts to date have positioned us very well for future growth in key markets in Canada. We have increased private pay retirement to 44% of the business with the goal of achieving 50% in time. Sienna continues to progress on its development plan, and expects to be on the ground with 2 of these projects within the next year. In addition, we are pursuing the development of freestanding retirement in key markets. With respect to our same-property portfolio, we continue to anticipate consistent performance from the funded part of the business and moderate single-digit growth from the retirement business. Thank you for your participation on the call today, and we will be pleased to answer your questions.
[Operator Instructions] Our first question comes from Jonathan Kelcher with TD Securities.
First, just on the retirement home occupancy decline, I know you noted that it was flu-related and lease-up. Is that all it was? Or is there any -- are you guys facing any new supply pressure in any markets?
I guess, there's the flu season, Jonathan, which was very aggressive. We had some residences that were in and out of outbreak, which means that you cannot admit residence or to a residence or potential prospects. So that's the challenge. But in addition to that, if you'll recall, we have 2 residences, which we recently acquired, which are in lease-up. So that contributes to some of that as well. And right now, there's no significant new supply that we would identify in any of our markets. There will be once -- we only have a couple of days, as you know, the Maple acquisition, but once that comes in, our sum in those communities of more well supplied market, as well as in the future, over the coming year, there will be some new supply in some of the markets in which we operate.
Okay. And as at occupancy included the acquisition?
Yes. That, as at occupancy, includes 4 days of the Maple acquisition, Jonathan, so in the both numerator and the denominator.
Okay. And secondly, just on the bed licenses, you were awarded in Brantford and Scarborough. How many licenses were you awarded or how many beds?
Well, this was -- both are -- were intended for top-ups for development projects, which we wanted to do to upgrade C homes or to rebuild C homes. So in Brantford, we received 70, and then Scarborough, we received 129. So right now, we're just going through all of the planning and modeling to look at how many we're going to build in total and the desired location. And we'll look forward to sharing more information on that one as we kind of confirm our plans and get some preliminary approval.
Okay. But that would be more a 2020 start or later than, I would assume?
That's right, yes.
Okay. And then just finally, there's a little bit of press a week or so ago about a class action lawsuit against you guys, and I guess a couple of other long-term care providers. Can you maybe give us a little bit of color or thoughts on that?
Yes. So I think it's important to keep this in perspective. It's important to note that it is only a proposed class action. It has not been certified. We do not believe that it has merit, and we certainly intend to vigorously defend the claims through the appropriate court process, and I think also it's important to note that Sienna is highly regulated. All long-term care homes are highly regulated in the province that we, Sienna, in our case, that performs both provincial and national averages on all of our quality indicators. And we do have a very complex population that we care for every day. We care for very marginalized, complex seniors, who in fact, our average as of today is under a year because we do care for very frail seniors that have complex health care needs.
Our next question comes from Fred Blondeau with Echelon Wealth.
Two quick questions for me. First, I was wondering if you could give us a bit more color on the trends you're seeing in the same-property operational expenses for both LTC and retirement segments. It seems like they are steadily increasing at this juncture. I was wondering what should we expect in -- for the next 12, 24 months?
Sorry, Fred, can you just expand on the question?
I was just wondering if you'd give us a bit more color on the trends you're seeing in the same-property operational expenses. It seems like the earnings operations trajectory...
Sure, Fred, yes. So I mean, if you compare our margin, I think that's probably a good way of looking at it because the source of revenue has been increasing as well. So we merged our Long Term Care and the Baltic portfolio. We call it Long Term Care/Residential. So obviously, the margin is going to be a little bit higher there as a mix because the Baltic portfolio had a bit of a higher-margin mix. And if you look at retirement, our margin has been in that for same-property in that 45%, 46% range, and that's where we expect it to stay. We don't anticipate much change in it. And the portfolio that we just acquired, that is at a lower margin. As Lois discussed in the previous call, when we acquired a portfolio of this size, the first year is really putting all the systems and processes together, and then over time, we will get to see some synergies. So we expect, from a transactional standpoint, the margins would be a bit lower than what we see from the same property.
Okay. And second, in terms of your projects like Keswick and North Bay, and -- I guess Bloomington and Island Park, could you remind us what kind of -- what would be your expected yields on these projects?
Sure. So for Island Park, which is an expansion project, so there's a lot of common areas which have already been built, and intensification opportunity usually have a bit better return, especially in our case. So we expect the cost of the project to be $10 million to $11 million range, and we expect to return close to around 9% on that. For other projects, which we have talked about both North and Keswick to be campus developments, which is a combination of Long Term Care and retirement residence, we expect that to be around close to 100 to 150 basis points over cost of capital just because there's lower return on Long Term Care, but also lower risk, and return -- high return, but obviously, a bit high risk because of the lease up challenge there usually in a new community.
Our next question comes from Pammi Bir with Scotia Capital.
Just going back to the lawsuit for a minute. Can you maybe just provide some high-level color on the legal process, and just how long this could play out?
Pammi, sure. So obviously, we won't comment on the process and the timing. I think we'll go back to what Lois mentioned that it is a proposed Class action that has not been certified. So obviously, there's a difference between those. We do not believe it has merit. So again, the timing in all of those things would depend a lot on different factors, including if it ever gets certified, which we, again, we believe at this point it, the lawsuit has no merit, and it has not been certified. So I wouldn't comment on that. I think what we will do is going forward, depending on where things are, we'll obviously provide updates on it on our quarterly information. And if something changes, we will do so sooner.
Got it. Okay. Maybe just switching gears. Can you comment on how the integration is going on the Ontario acquisition? And you mentioned expectations for perhaps some synergies there, but what levers do you have that you can often, I guess, pull in terms of driving margin higher?
Yes. Well, I guess, this is an operating business, as you know, Pammi. It's -- we have over 1,100 residents and about almost 800 staff that we're orientating and on-boarding. So this is -- we're working well, and well on our way with all of the back office integrations, such as payroll and finance and so on, all at the back of the house. So this is going to take time. I think we've indicated for an acquisition of this magnitude, it can really take up to 1 year to get any sort of synergies, and that we don't really see any in the short term. But what I can say is we're very pleased with the team, and the assets and the expertise that they have, and certainly add a lot of new dimensions to our retirement platform.
Great. That's helpful. Just maybe one last one in terms of, I guess, the pipeline of acquisitions and sort of what you're seeing in the market? Can you just comment on what's out there today? And is anything sort of in any, I guess, advanced stages of discussions?
No. I would say that we'll continue to be very disciplined and strategic. Right now, we are very focused on integrating all of the acquisitions that we've done recently in the last 12 months or so.
Our next question comes from Michael Smith with RBC Capital Markets.
Just wondered if you have any comments on the Ontario election campaign. There's been a number of promises made with regards to senior care in Ontario.
Not really. I mean, I think regardless of the party, I think there's an acknowledgment that senior care is a significant priority, really, across the country with the aging demographic that there has to be solutions for all levels of seniors' care. I think that specific to Ontario, all parties recognize the need for more investment in long-term care in terms of staffing, as well as additional beds and capacity. So I wouldn't see any significant change of direction in the immediate term. I think, regardless of the party, we have pretty good -- we have excellent relationships with all regulatory authorities and good relationships with all SVPs. So we wouldn't see a significant change other than -- over the near and long term, there's going to be continued emphasis on the needs for seniors' care and solutions.
Okay. And just switching gears, so when you said the LTC expect same-property NOI to be consistent with prior years, I just want to be perfectly clear, that's basically 1% to 2%?
Yes, that's right. I would say more 0 to 1, Michael, because the rates usually go up in inflation and the cost usually rise a bit faster. So I would say, I think, last year, our same property long-term care NOI was around 1.4%, and that's probably would be in the range that we'd expect, 0 to 1.5%.
So 0 to 1.5%. Last year, you're 1.4%. But 0 to 1 to be conservative is kind of what you're saying?
Sure, yes.
Yes, and in terms of debt, you've made some good progress getting your debt levels down to 50.3. What is your goal?
I think we feel -- and again, as you know, our debt is to grow book value, not fair market value, and a big part of our portfolio was valued fair market value in 2010 when we did our IPO. So again, if you did it from a fair market value perspective, it easily would be in the 40s. We think around 52% is not a bad place for us, given the stability in our Long Term Care structure. So we -- with the [indiscernible] wards we are at 48%. With the Maple acquisition, we went up a little bit just because we call it the strategic, and over time, will come down using our retained cash. So the range we are in today, at 48% to 52%, I think that's a pretty good range for us, and we will go up and down, depending on the use of cash.
Okay. And lastly, I guess, I'm a little puzzled. I mean, for the last 2 years, you've consistently outperformed both the provincial and national averages on quality indicators. You're highly regulated. You got almost a 90% satisfaction rate. I just -- I was really surprised that there could be any -- with all -- given all of that, like this suit, I mean, it just seems like it's totally frivolous.
We can't -- I mean, from time to time, you get suits, and that's just sort of the nature of the business, unfortunately. It's just of course, this got so much press around it.
Right, right, and the press doesn't seem to be picking up all the good things. Anyhow, I'll leave it there and turn it back.
Our next question comes from Troy MacLean with BMO Capital Markets.
You've added a lot of services in your retirement portfolio over the last number of years. I was just wondering, is there any opportunity to add any additional services to the portfolio acquired at the end of March that they didn't currently have?
I would say that, I mean, yes, some of them were doing assisted living. I would say, across the board, there's always opportunity to add additional services as residents age. What we'd typically find is that the longer the residents stays with us, the more services that they require, and that's the beauty of how we approach this -- our service deliveries. We can provide services, as residents require them, and they're maybe coming and don't need them, and they're more independent. So we will, across the portfolio, continue to add services over time, Troy.
And then just on the Stoufville retrofit, I was wondering how actual cost came in versus budget net of the projects nearing completion.
So that was our first project, and we anticipated our cost to be around $5 million to $6 million, and we would be -- predictably would be within that range. So we don't see much change in it. And it was a good way for our team to kind of get through the development process. It was a much smaller project, a small wing. So there was a lot of learning, which came out of this, which obviously we would apply in densification opportunities, and also the campus and the standalone retirement projects.
And then just on the class C redevelopment, I understand most of that's going to be greenfield. Typically, over the last couple of years, what kind of inflation do you see in redevelopment cost for LTC properties in Ontario? Is it more in line with inflation? Or is it higher?
It is higher than inflation in what we have seen, and it is trade-specific because of -- there was, obviously, has been a huge change in the residential side. So a lot of the trades have been difficult to find, and they have become more expensive. And that, again, as we got new beds, as Lois mentioned, we are still going to run through performance because the cost does change on a consistent basis. And when we do a pro forma, depending on the construction starts, we actually build in increases in it, depending on what has happened in the past. So it -- the cost has not -- like capital inflation has been higher, and we would budget as such to ensure whether a project is feasible or not.
Our next question comes from Yashwant Sankpal with Laurentian Bank.
I just want to talk or discuss the retirement home portfolio. I mean, despite the bad flu season and the margin -- the occupancy decline, your margins held up quite well. So just want to get some more color around how you guys manage to keep your margins high in the 46% range. And also, I want to understand how -- once the Baybridge acquisition is fully integrated, how your margins will trend as compared to where they are right now.
Well, I guess, the only thing I can say on margin is that we do -- we manage the expense side as well, Yash, like when occupancy is down in a residence, we make sure that our -- we're being efficient with our staffing and our operating expenses, and this number, obviously, the majority are fixed. But whenever there's variable, we manage that. And with respect to the Maple, our margin may come a down a little just because there's -- some of them are smaller properties, and what we have now, our overall average has got some a number of larger communities, and as you get around 100, 120 suites, they're a little smaller. So margin -- overall, margin may come down as we grow.
Just -- what is the current margin of that portfolio, NOI margin?
So may we acquire it? I don't have the number top of my head. It was in the 30s, Yash. And again, I wouldn't think that it would go all the way to 46, where we are today, because as Lois discussed, some of those property are smaller. It is market-specific. So even in our portfolio, which is same property, we have margin from 30s to higher because the average is 46. So again, for the time being, we expect the margin to be similar. And then a year later, as we put it on our platform, we expect there will be some synergies, which will help expand the margin for that portfolio.
Right. Do you have the weighted -- or the average monthly rate for that portfolio, by any chance?
It's the numbers, I guess we can back into it. I don't have -- again, we don't have it top of our head, and you know what, so what?
Is it comparable to your existing portfolio?
It will be a little bit less just because our existing portfolio has bigger sites versus a percentage of smaller ones, so it would be lower than our existing portfolio in terms of average rent per suite.
And I'm not showing any further questions at this time.
Well, thank you very much for joining our call this morning for your questions and your support. And we'll look forward to seeing all of you at our AGM, we hope. Have a great day and a good weekend.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.