Sienna Senior Living Inc
TSX:SIA
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Sienna Senior Living Inc
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Ladies and gentlemen, welcome to Sienna Senior Living Inc.'s Q1 2019 Conference Call. Today's call is hosted by Lois Cormack, President and Chief Executive Officer, and Nitin Jain, Chief Financial Officer and Chief Investment Officer of Sienna Senior Living Inc. Please be aware that certain statements or information discussed today are forward-looking and actual results could differ materially. The company does not undertake to update any forward-looking statement or information. Please refer to the forward-looking information and Risk Factor sections in the company's public filings, including its most recent MD&A for more formation.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 the company's 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 host's remarks on the company's website under Events and Presentations.With that, I will now turn the call to Ms. Cormack. Please go ahead, Ms. Cormack.
Thank you, Julie. Good morning, everyone and thank you for joining us on our Q1 call this morning. In the first quarter of 2019, our team continued to focus on operations and on integration of the acquisitions from 2018. Our Q1 results highlight the benefits of running a more balanced larger-scale platform.Q1 2019 net operating income grew by 20.1% year-over-year compared to Q1 2018, which was driven by growth from accretive acquisitions, in addition to strong organic growth. Same property net operating income increased by 7.3% in our retirement portfolio, and by 4.3% in long-term care. Diluted OFFO per share increased by 4.2% year-over-year to CAD0.32 in Q1 2019. This includes a mark-to-market adjustment of share-based compensation, reflecting Sienna's share price growth. We have continued to strengthen our balance sheet and ended the quarter with a debt-to-gross book value of 47.8%, a reduction of 250 basis points year-over-year. Retirement net operating income is now 46% of the overall business. We are well along the way to meet or exceed our strategic goal of a 50% private pay, 50% funded portfolio. Q1 2019 occupancy in the retirement same property portfolio declined by 1% year-over-year to 91.6% as a result of higher resident attrition rate and softer occupancy in the acquisition portfolio.Now turning to Slide 8. At an average occupancy of 98.2%, the long-term care portfolio remains virtually at full occupancy with waiting lists for each of our long-term care homes. Same property net operating income grew by 4.3% in the quarter. This was largely as a result of the timing of expenses. Resident and family satisfaction continues to be a priority at Sienna, and we are very proud of the contribution of our 12,000 dedicated team members, who create and great resident experience and who have enabled Sienna to outperform national and provincial averages on publicly reported quality indicators. We remain focused on Sienna's people strategy, and are investing in new ways of attracting, recruiting and retaining talent.We recently launched a new Careers website to enhance the user experience and to support recruitment of key physicians across the company. As part of our commitment to the team member experience and a great culture, we are launching a new team engagement survey and platform to monitor and measure engagement on an ongoing basis. We are also investing in point-of-care technology and an electronic record keeping to improve the workflow for nurses and for personal support workers. With the flu season largely behind us, we are ramping up our marketing campaign to increase awareness and to invite prospective residents to experience Sienna retirement residence in their local community.Turning to Slide 10. Fundamentals in the Canadian senior living sector remained strong. According to stats Canada, the average growth rate of the seniors population aged 75-plus will double in the next 20 years, with a compound annual growth rate at approximately 3.9%. The sector's key challenge is to mask the rapidly-growing demand for seniors' residences with supply. While we have seen some levels of temporary oversupply in certain markets such as Ottawa and the Durham regions, we believe that our geographic diversity and industry-leading platform positions us well, as the market adjusts to the growing supply and demand. With the Ontario government overhauling the health care system aimed at providing better access and reducing hallway medicine, we have been engaging with hospitals in our communities on discussions about the Ontario health teams. These health teams should ultimately improve the experience for seniors and their families who are navigating the transition between hospitals and other parts of the system, including retirement residences and long-term care homes.I will now turn the call over Nitin to discuss our financial results.
Thank you, Lois and good morning everyone. I will start on Slide 12. Net operating income for the quarter grew by 20.1% or CAD6.5 million compared to the same period last year, for total NOI of CAD38.9 million. This increase was largely a result of the organic growth, accretive acquisitions, and timing on Good Friday, which fell in Q1 last year and in Q2 this year. The Retirement division generated same property NOI of CAD11.8 million, an increase of 7.3% over the prior year. This was driven by a combination of market rate adjustments, annual rate increases, and reduced variable expenses, partially offset by softer occupancy.Sienna same property long-term care NOI for the quarter increased by 4.3% to CAD21 million, largely because of CAD0.5 million timing impact from Good Friday. Excluding the Good Friday timing impact, same property long-term care NOI delivered stable 1.9% growth over the prior year period. Diluted OFFO per share increased by 4.2% to CAD0.32. Excluding the impact of mark-to-market stock compensation, OFFO per share would be CAD0.34 per share. This growth was driven by income from accretive acquisitions completed at the end of Q1 2018, and strong organic growth, partially offset by incremental interest expense for the acquired properties. Diluted AFFO per share was CAD0.353, up 2.6% year-over-year. This increase was driven by higher OFFO. And excluding the impact of mark-to-market stock-based compensation, AFFO per share would be CAD0.37.Now moving to our financial position on Slide 14. We continued to strengthen our balance sheet. At the end of Q1 2019, Sienna's debt-to-gross book value was 47.8%, a reduction of 250 basis points from Q1 2018. Sienna's debt to EBITDA declined to 7.1x in the quarter compared to 8.2x in Q1 2018. Our interest coverage ratio remained high at 3.8x, unchanged from Q1 2018, and the average debt term increased by four months year-over-year to 4.4 years in Q1 2019, highlighting our refinancing initiatives over the past four quarters.We intend to optimize our capital structure by effectively managing our upcoming debt maturities, and by maintaining a healthy level of liquidity and a favorable credit rating. In March, DBRS confirmed our A (low) credit rating with stable outlook for the company's CAD322 million Series B Debentures. Sienna ended the first quarter with approximately CAD137 million in undrawn credit lines and cash, which we can use to further drive the company's strategy.With that, I'll turn the call back to Lois.
Thank you, Nitin. We made significant strides in executing our growth strategy of building a balanced portfolio of high quality retirement and stable long-term care residences. We are highly optimistic about our future growth prospects. Going forward, we will remain strategic and disciplined in our approach to growing the business. Our continued focus is on high quality and accretive acquisitions in key markets in Canada, as well as strategic developments that complement our existing platform. We remain optimistic about our future development opportunities, and are on-track to complete the expansion of Island Park by mid-2019.As part of our commitment to a strong operating platform, we are constantly working to improve the residents' experience and are making further enhancements to services and care, responding to the changing needs and preferences of our residents. Looking ahead, we expect the long-term care portfolio to deliver strong growth consistent with 2018. And with respect to the retirement portfolio, we expect moderate single-digit growth going forward. We believe the outlook for Sienna is strong and we expect to continue the progress that we have made on our strategic priorities.Thank you for your participation on the call today and we will now be pleased to answer any questions.
[Operator Instructions] And your first question comes from the line, Jonathan Kelcher with TD Securities.
First question, just on the acquisition -- occupancy was down a little bit in Q1. Have you started to see an improvement in that beginning in Q2?
Good morning, Jonathan. Thank you. Today, our occupancy is pretty much in line with what we reported at the end of Q1. And it was largely -- we are always expected, as you know, the winter months, there's the flu season, we have a higher level of attrition. Our residents aren't out doing tours and moving in, in the winter months. So we usually expect this. And then in addition there was a softer occupancy in the acquisition portfolio.
But it seems to me like the acquisition portfolio performed a little bit worse than the stabilized portfolio, is that fair to say?
Yeah, that's fair to say and that's the result of -- when we acquired this portfolio, we knew that it would take a full year to integrate and so we're well on track with that. And we expected that as well as some attrition as we stabilize onto our platform.
Okay. And then just secondly on the MD&A and you talked a little bit about it in your remarks, you're enhancing your website. Well, first of all, is it just internal or is it -- just for internal employees or is it more broad based than that?
It's both. Today, we've enhanced the career section of the website which is for -- primarily for external potential candidates. And in Q2 shortly we're launching a revised Sienna website for -- the public-facing website, which will be a significant enhancement from what we have today.
Okay. Are you going to promote the Sienna name more, is there any sort of change in your strategy on that front?
No, I wouldn't say that. We believe that this is a local business and we have always promoted the name of the community locally. So each of our residences have its own unique name and that's how it's known in the community rather than by Sienna. And we will continue to do that to focus on the local communities with our marketing campaigns and so on. What the website does is, it's really drives potential prospects to the sites, to the property level.
And your next question comes from the line of Chris Couprie with CIBC.
Couple of questions, just in terms of your outlook. When you talk about moderate organic growth in the retirement home business, 7% in this quarter, would you consider that more than moderate? In other words, how should we think about the business the balance of the year?
Good morning, Chris. For us, in that 7%, there is around 0.9% or 1% impact because of Good Friday, so you remove that, and there might be partially other timing changes in it because our margin is a bit higher in Q1. And we don't believe that's a good run rate for that margin. So, I would say when you said moderate single digits, we are more closer to 5% than we would be to 7%.
Okay, that's great. In terms of developments, I think you had a few redevelopments that you were looking to, I think it was [indiscernible] in North Bay, potentially, that you were looking at to I think kick off maybe this year. Any update there? And then in your most recent slide deck, you call out some excess land for future expansion. Just curious as to how many units you think you might be able to add there, and what will it take to kick off these expansions?
I guess on the development -- re-development, we do have three projects, which have received preliminary approvals. Right now, we're just waiting for some changes to the program and our association is working with government on any potential changes to the program, as a result of the recent provincial budget announcements. So right now, those are -- we wouldn't see anything happening in '19 with those projects in terms of getting started. It would be more like 2020, as things line up in terms of approvals and the program metrics. And in terms of expansion of current sites, we do have opportunity there, and we're just exploring all of our opportunities. We have about three or four sites that have potential for intensification. And so we're looking at the markets in each and which ones make the most sense and the timing. And again there, we would expect if any, that would be in 2020.
And your next question comes from Matt Logan with RBC Capital Markets.
Just following up on the provincial budget. Can you talk about the impact to your business. And any thoughts on the Ministry's efforts to increase long-term care beds?
Well, in the provincial budget, there was a re-commitment to re-development of the older C-Class beds, as well as the addition of 15,000 new long-term care beds. So that was all good news. We're just waiting, I think for details as I mentioned, to our associations working with the ministry, to determine what the details of those programs are going to be in terms of metrics as well as the approval processes.
But I guess, suffice it to say there's a little more commitment in terms of providing increased levels of construction funding, particularly given where construction costs have trended over the last few years?
Yes. We're just -- again that's the detail that our association is trying to -- is working through with the ministry. We are optimistic that certainly government seems intent on increasing capacity to -- make more capacity for seniors, given the current wait list of about 30,000 seniors and the hallway medicine challenges in the province.
And with the government looking to kind of increased supply, would you ever consider partnering with other REITs that might have excess density?
Sorry, what would you mean, Matt?
In terms of, we've got a number of retail REITs who have excess land and are looking to intensify their sites. Would you ever considering building on some of that land or forming JVs with other businesses?
We would certainly do that to re-develop our current sites. We'd say that our focus really is on re-developing of the current beds that we have, the 2,200 C class beds that we have to re-develop. That really is our focus and we would just add additional beds to those projects to make them work. So we will definitely be interested in JVs and opportunities.
It makes sense. Makes sense to me. In terms of staffing, I've got I guess two questions. And one, is it too early to discuss the impact of any of your recruiting and IT changes? And two, how do you see the impact of demographics on Sienna's ability to retain talent over the next, call it 5 to 10 years?
Yes. Staffing is definitely a challenge sector wide. So I mean we've been working hard at this for several years now on learning and development, and a number of programs to recruit and retain staff. So we're just constantly working in advancing what we do in this regard. A lot of what we do is focus on our culture and team member engagement, and the information technology we're implementing in our site is really to improve the workflow and quality of work life for our employees, and that's an ongoing initiative that we've had in place, and expect to be making further improvements in mobile technology by the end of this year.
Your next question comes from Brendon Abrams with Canaccord Genuity.
Hi, good morning. Just with respect to the retirement operations, it seems like rate growth helped offset any occupancy losses during the quarter. I'm just wondering if you can provide any color in terms of what type of rate growth you're seeing on a percentage basis? And I'm not sure if you would differentiate between existing and new tenants or residents?
Yes, we do. Rate growth for existing tenants is usually around 3% on the annual increases. On turnover, it depends on the property, and where we have full occupancy, we would get a higher than that on turnover, and in communities like Ottawa that are undersupplied, we wouldn't be getting any significant uptake on turnover.
Okay. So when you say on average across your portfolio, new tenants will be above that 3% threshold in terms of...
On average, yes.
Okay. And I don't believe -- you segment it out in the MD&A, I could be wrong, but in terms of the retirement portfolios, are you seeing any material differences in fundamentals or between your BC and your Ontario properties?
We know -- Hi Brendon, good morning. We do not segment BC and Ontario because I think by itself the segments are smaller, so one property could have a pretty material difference. Just overall market fundamentals in both BC and Ontario, the vacancy rate in BC is much lower. So there was a CBRE report which talked about a vacancy rate of around 3% roughly. So, dependent on where our properties are, be it direct competition then, obviously our vacancy rate might be a little bit bigger than that. But otherwise, we see similar results. And in Ontario, the vacancy rate is close to 10%, and that again unless we have a couple of markets which are in a bit of an oversupply, which Lois has talked about it before, for example, Ottawa. And again our results will be similar to what we see as overall trends from CBRE.
Right, okay. And I think in that same CBRE report maybe you're referencing, it seems like transaction volumes across the sector are a lot lower than the past years, perhaps just due to limited availability of product. Is that what you're seeing there as well?
I think the pipeline continues to be strong. We don't have specification targets on annual basis to grow. For example, between Q1 of '18 and 12 months prior, we grew by close to CAD500 million. So for us, it's not that every year we have to do a certain amount. So, our first focus is make sure that Maple portfolio that we bought last year is well integrated and that is on track. So, that is really our first focus. But we'll keep, but continue to look. So, I think the opportunity is still out there. We don't see a huge change in the number of opportunities out there.
And your next question comes from Troy MacLean of BMO Capital Markets.
Good morning. Just wondering if you're seeing any indication of a slowdown in building in either Ottawa or Durham, like projects getting canceled or delayed? Or is it still seems like the shovels that have gotten on the ground, the projects are going to finish?
We would -- we don't see any slowdown in those markets. In fact, there is still new products coming into Ottawa Kanata area all the time, just a couple of new ones that are going to open within the next year or so.
Would you -- are any of these projects built by developers who you think would sell and would you add in these markets? Or are you happy with what you have?
I think we're pretty happy with what we have in the Ottawa market. We only have one in Durham Region, and we have no plans to add to capacity there at the present time.
In your comments, you mentioned changing or adding to the service and care for the retirement homes, and I was just wondering, would these be something that you charge more for, or is it really just to more efficiently serve residents and would there be any margin impact?
No, there wouldn't be any margin impact at all. I think it's really just constantly enhancing the services that we provide around -- the residents' preferences and needs change. As I mentioned earlier, it is a local business. So, we find difference in preferences in BC than Ontario. So, we're constantly kind of revising menus and leisure activities and programs to meet residents' needs. So, we have a huge focus on that, as well as in some communities that residents have a need for more care and where we have the ability to designate some care units. We will be doing that, just cost doing care and that sort of things. So, just driving some internal efficiencies as well as improving residents' experience. That's kind of an ongoing focus.
And does your size give you an advantage versus maybe some of the homes that are getting re-built by maybe smaller operators? Like does that give you an advantage, you think that will when you'll be able to win over time even in the crowded market?
I think so. Larger communities are more efficient to operate. There's no question about that. But having said that, we also have some smaller communities, and you can develop a very unique approach to a niche resident population in those communities as well.
And then just on the 15,000 new LTC beds the Ontario government's talked about, do you think they'll give those out to kind of enhanced returns and redevelopment projects and make all the projects as efficient as possible, get the right number, like you said, a lot of the -- some of the B homes are smaller like below the efficient size. I know you probably didn't have the details out there, but do you expect that to happen?
We definitely do. In fact that's what we've seen. In any bed that have been awarded to date, the priority seems to be going to projects, the C class projects to make them work and to make the right economic size because they tend to have to be in multiples of 32. So that's definitely the direction we've seen to date and that we would expect to continue.
And then if that were to play out, do you think you could increase your B and C re-development program, maybe a little quicker than what you have outlined previously?
Potentially, I think it really all depends, sort of what details we're able to ascertain post the provincial budgets that are being worked through now.
And your next question comes from Tal Woolley of National Bank Finance.
The Ontario Long Term Care Association put up their regular sort of annual update and they did speak to on the labor side, trying to utilize more RPNs in place of RNs, and maybe coming up with a new class of employees that could substitute for the PSWs. Is that something you're supportive of? Do you think the healthy solution that could work going forward.
I guess what we -- we are supportive of that and we would say that in fact, we have in some of our properties we're already using care aide and we wouldn't say that a substitute for PFWs, it's in addition to. So there's things that a care aide can do that would free up personal support or to provide the direct care, or the care aide can do things like portering and bed-making and that sort of thing. And that's a great model. That certainly is something we're supportive of and advocating for. And RPNs are just as tremendous addition to the team. And again, they wouldn't replace RNs because both have a very valuable role. So we're just looking for I think, more I guess, less rigidity in terms of the how the compliance regulations are interpreted and applied so that we can use our RPNs more effectively. And this is nurses week, I will say we're very pleased with all the services and care that our nurses get every day, both our RNs, RPNs and personal support workers.
Got you. And the one thing that also came out of the budget, it was sort of a glancing reference to transitional care and the government being supportive of you looking more into that, do you have any further details, maybe on what sort of would come under that umbrella?
We don't have a lot, but this is something we have done in the past, where we do transitional care in retirement homes. And this kind of frees up seniors who would otherwise be in a hospital that don't necessarily need to be there, but aren't able to go home. So, it's something that we're very interested in doing more often. We have been a meeting with some of the hospitals in where we have retirement homes close by, and having those discussions to see whether we can get involved in those pilot projects.
Okay. And then just lastly, on the same property NOI growth in the retirement business, you talked about on the rent side you're seeing 3% kind of growth. But a lot of that extra incremental upside has been on cost containment. Is there, as we think about how to that same property pool will evolve going forward like, is there any sort of limit we should be concerned about, like you can't cut costs to zero. So, is there like a threshold at which you think we shouldn't expect that that same cost containment can come through?
Sorry, is that specific to retirement?
Yes, I was just thinking on the retirement side. It would look to me, if you're talking about 7% this quarter, and roughly -- 5% going forward that, you're getting about 3% on the rent side and then the balance is coming from levering the operating costs. And sometimes there's only so much you can kind of do on the cost side. I'm just wondering, how much more work you think you can do on the cost side.
Well, the way we do the cost side is, there is a variable expenses, we were able to make some efficiencies when occupancy is lower. So in the winter months for this quarter with resident attrition and some softer occupancy, we're able to make some improvements in the variable expenses, which we do. On the other side, it's not just the in-place rent, but as I mentioned earlier, with turnover, there is greater than the 3% increase. So it's a combination on the revenue side. And on the expense side, it really is just being as efficient as we are, being cost conscious and disciplined cost management as well as managing the variable expenses when we have softer occupancy.
Your next question comes from the line of Pammi Bir with Scotia Capital.
Thanks, good morning. Just coming back to the acquisition portfolio and one of the questions earlier, in terms of the year-over-year occupancy drop, was most of that market-related perhaps from new supply or really just a function of the integration process?
I would say in the Ottawa market, it's supply because there is a few properties in that market. And as well as on the integration, just friction with integration in terms of getting everything onto our platform, some higher resident attrition rates with resident acuity. That's really in a nutshell.
Got it, okay. And then just with the integration, I guess getting closer to I guess the final stages of that portfolio. Can you comment on maybe what you're seeing in the acquisition market and perhaps areas where you'd like to actually raise your exposure.
I think as Nitin said, there's always opportunities. We're very disciplined, and we look at every opportunity that comes out. We would like to grow across Canada particularly further in the western provinces.
Anything in Quebec, that's of interest at this stage?
Not at this stage. We haven't seen anything that would make sense for Sienna.
Your next question comes from the line, Yash Sankpal with Laurentian Bank.
I just want to focus on the retirement home margins one more time. So looks like the margins were up in the quarter because you got some variable costs. And if that was...
It was also Good Friday, Yash.
Right. So, what I'm trying to understand is what would be a sustainable NOI margin for your retirement home portfolio after you have integrated the BayBridge portfolio?
Yash, I think every quarter-to-quarter, our margin could change. So even if you look at our same-store portfolio or same property portfolio.
I'm looking for an annual number, like roughly.
Yes. The annual number for example, for Q4 '18, which is published, is we finished the margin around [ 44.5% ], it's 44.9% I think is the margin number, compared to the 46 points that we just -- in Q1. And as Lois mentioned, part of that is because of timing of Good Friday. So I would say that's probably is good way of thinking on margin for us, is the annual number that we did it last year.
All right. And in terms of retirement home occupancy, where do you expect given what you see right now in the market in your portfolio, where do you expect your year-end occupancy to be?
I think year-end, we would end where we did in at the end of 2018.
Okay.
And that, Yash, that was 91.6% at the end of '18. So similar numbers. So today we are at 90.4% as an average occupancy. So again, we expect some uptick in occupancy between now and end of the year.
Got it, okay. And just one more question on your debt refinancing. What is the average rate you're seeing for your maturity, like refinancing?
So we have around CAD90 million of debt coming due this year at different times and the average rate for this CAD90 million is close to 4.5%. So we do expect us to be able to refinance, roll over via multiple scenarios that we're looking at, at these rates or similar. And again there's there so many options available depending on what property type it is. For example, CMHC rates could be very favorable. There is obviously a challenge with loan to value there at times. Then there is an opportunity of doing something like revolver, what we have already exploring rate, but also gives us lot of flexibility. So again high level, we would say that we expect to refinance them at similar rates or better.
[Operator Instructions] And your next question comes from Chris Couprie with CIBC.
Hi guys, just two quick ones. In terms of the Ottawa and Durham assets that you guys called out, how would you characterize occupancy in these assets in this quarter versus a year ago. And then, how long do you think it might take for those properties to re-stabilize. And then my second question is just on -- circling back on the Ontario budget. The ministry called out a commitment to upgrade 15,000 older long-term care beds. I believe the previous government had used the number of 30,000. I think that maybe was over two different time periods. I'm just wondering if you can comment on that difference.
Sorry, Chris, what was your reference to the 15,000? Were you talking about older long-term care beds, or new ones?
Yes. Older.
Older. Well, there is 30,000 older B/C class beds in the province today. So that is the number of beds. I think the government referenced 15,000, that was probably in reference to a certain period of time.
Okay.
And then with respect to Ottawa, we would say it is softer there. Now having said that, we have more properties now that with the acquisition that we did, but we would say that the occupancy in Ottawa softer than it was a year ago. And we would expect stabilized occupancy in that market to be probably never more than 85%.
Okay. And what about Durham?
Durham again, we just have one property there and we would see that as a very temporary kind of adjustment. So I expect to be -- expect to stabilize within a year or so.
So relative to stabilized levels in Ottawa, how are your assets performing?
And the rest of Ontario, it would more consistent with -- well, you heard what -- I think CMHC and CBRE guiding at 90%.
And I am showing no further questions at this time. I would now like to turn the conference back to Lois.
Well, thank you everyone for joining our call this morning for your support of Sienna, and we look forward to seeing all of you at our AGM on May the 22nd. Thank you and have a great day.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.