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 2023 Conference Call. Today's call is hosted by Nitin Jain, President and Chief Executive Officer; and David Hung, Chief Financial 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 statements or information. Please refer to the forward-looking information and Risk Factors section in the company's public filings, including its most recent MD&A and AIF 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 in the 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 assessing 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 Presentations.
With that, I will now turn the call over to Mr. Jain. Please go ahead, Mr. Jain.
Thank you, Cheryl and good afternoon, everyone, and thank you for joining us on our call today.
We have many reasons to be optimistic as we move further into 2023. We -- our Retirement segment is showing strong year-over-year growth. Our Long-Term-Care operations continue to stabilize and our cost management strategy is showing early signs of success. In addition, we are strengthening our ability to recruit and retain team members and have reduced our reliance on temporary agency staffing.
With respect to operating results, strong demand for our retirement residences supported an 11% year-over-year increase in our same property NOI in the first quarter. Occupancy growth in combination with rate increases supported a double-digit increase in our Retirement segment. We will continue to capitalize on the growing demand for seniors living and leverage our Aspira brand and signature programs to generate strong interest in our retirement residences.
Q1 resident move-ins remain consistent and supported occupancy growth despite the typical seasonal trend of higher winter move-outs primarily to Long-Term-Care. Average same property occupancy was 88.2% in Q1, up 300 basis point year-over-year. In our acquisition portfolio, average occupancy increased by 350 basis point to 85.7% since we acquired 12 residences in Ontario and Saskatchewan in May of 2022. For the full year, we expect occupancy to reach approximately 90% in our same property portfolio and exceed 87% in our acquisition portfolio in 2023.
Our Long-Term-Care operations saw steady increase in retirement and resident resonated admissions with most communities returning to occupancy levels at or above 97% by the end of the first quarter, making them eligible for full funding. Most remaining pandemic related restrictions have now been lifted, and there is a real sense of optimism among team members, residents, and their families. The lifting of restrictions also contributed to a strong results.
Same property NOI in a Long-Term-Care segment increased by 9% in the Q1 compared to prior year. Demand for Long-Term-Care beds is higher than ever. Over the next 10 years, demand for Long-Term-Care is expected to increase by nearly 40%.
At the end of March, the Ontario Ministry of Long-Term-Care announced a funding increase for Long-Term-Care providers providing a 2% increase in the other accommodation funding per diem. Other accommodations covers everything from housekeeping, building and property operations and maintenance, as well as dietary services.
For the long-term viability of the sector, it is crucial that funding reflects the impact of inflation. Together with other sector participants will therefore continue to work with the government to address this funding shortfall.
Moving to slide seven. Among the major improvements during first quarter was a reduced aid reliance on agency staffing to full staffing gaps. We reduced the number of agencies we are working with from over 100 to less than 20 and negotiated improved contract terms such as enforcing a minimum fill rate threshold while reducing rates by approximately 15%. You will start seeing the impact of this improvement in the second quarter.
Year-over-year, we were able to reduce overall agency cost by 35% in the first quarter and by 29% since fourth quarter 2022. Through a combination of an improving operating environment, fewer staff holidays compared to Q4, and a focus on filling vacancies with permanent team members rather than temporary agency staff.
The need for agency staffing will always exist, but to a much lesser extent. In recent years, many healthcare workers across the sector left their permanent jobs to work for agencies, which had a significant negative impact on team members' morale and resident satisfaction. We will continue to pursue all avenues to lessen our reliance on agency staff.
We have been working on a number of initiatives to deal with the ongoing staffing shortages. As part of our talent acquisition strategy, we have improved our onboarding process and have further intensified our campus recruitment. We have placed approximately 900 students at our residence in the first quarter alone and hope to hire many of them once they graduate.
We also ramped up the placement of temporary foreign workers and we continue to employ Ukrainian refugees. In addition, we invested in an automated centralized scheduling and call out system. The system helps to fill staffing gaps with our own team members before ships go to agency staff. It also provides tighter control on overtime and offers insight into future staffing needs. Today, the system has been rolled out across all of our Long-Term-Care communities and plans roll it across our retirement residences are underway.
Moving to development. At Sienna, our focus of owning a diversified portfolio of private payer retirement residences and public funded Long-Term-Care communities is reflected in our development initiatives. Our current retirement project in Niagara Falls is scheduled to be completed in the fourth quarter 2023. The estimated total capital investment for 100% of this joint venture with Reichmann Seniors Housing is approximately $55 million. Pre-leasing indicators for the 150 suite retirement residences have been strong.
In addition, we have started construction at our campus of care project in Brantford where we are replacing 120 Class C Long-Term-Care beds with 160 Class A beds and adding 147 retirement suites. The estimated total development cost for this project is approximately $140 million for which we will receive approximately $3.3 million of construction funding annually over 25 years for the Long-Term-Care portion. The estimated development yield for this project is around 8%.
We also continue with construction at a redevelopment project in North Bay where we are replacing 148 Class C beds with 160 Class A beds. The total development cost for this project, which has an approximate 7.5% development yield is close to $80 million for which we will receive $3.3 million of construction funding annually for 25 years. Once these three projects are complete and operational, they're expected to lower Sienna's AFFO payout ratio by mid to high single digits.
With that, I'll turn it over to David for an update on our operating and financial results.
Thank you, Nitin and good morning, everyone. I will start it on slide 11 for financial results.
In Q1 2023, total adjusted revenues increased by 14.5% year-over-year to $199.6 million. This increase was largely due to occupancy and rental rate growth and additional revenue from the 12 properties we acquired in Q2 2022 in our Retirement segment, as well as flow through funding for increased direct resident care and funding received in relation to wage enhancements in our LTC segment.
Total net operating income increased by 13% to $36.3 million this quarter compared to Q1 2022, mainly due to a 3.9% -- $3.9 million increase in same property NOI in the Retirement segment, as well as additional NOI from the 12 retirement properties we acquired in Q2 of last year. Our retirement same property NOI increased by 11% to $15.3 million in Q1 2023 compared to last year, primarily as a result of strong year-over-year occupancy and rate increases, partially offset by higher labor and food costs, increased maintenance and utilities expenses.
A successful leasing strategy and solid demand in key markets supported strong year-over-year occupancy growth in our same property portfolio. Same property NOI in our Long-Term-Care segment increased by 9.1% to $19.3 million in Q1 2023 due to a more stabilized operating environment in addition to retroactive funding for expenses incurred in prior years.
At the end of March, we received an additional information from the Ontario government with respect to the funding of third and fourth beds that have been permanently closed in our older Class C homes. The government will continue to fully fund the other accommodation per diems until March 31st, 2025 for these beds. At the same time, there will be a gradual funding reduction for the nursing and personal care per diems over the next two years.
Cost pressures and high inflation have impacted our operating margins in both our Retirement and Long-Term-Care segments for some time. Many of our recent initiatives have been focused on cost management and early signs of their positive impacted are reflected in our results.
Moving to slide 12. During Q1 2023, operating funds from operations increased by 14.3% to $18.4 million compared to last year, primarily due to higher NOI and lower general and administrative costs offset by higher interest expense. OFFO per share increased by 5.9% to $25.30 in Q1 2023. Adjusted funds from operations increased by 10.6% to $18.2 million compared to last year. The increase was due to higher OFFO offset by higher maintenance costs and a decrease in construction funding income. AFFO per share increased by 2.5% to $24.90 in Q1 2023. The AFFO payout ratio was 94% in Q1 2023, a 230 basis point improvement compared to 96.3% a year ago.
With respect to our debt metrics, we lowered debt to annualized adjusted EBITDA to 8.4 times in Q1 2023 from 8.7 times in Q1 2022, and increased our liquidity to $308 million as at March 31st, 2023. In addition, we paid down $29 million of our revolving credit facility during the quarter using lower cost mortgage financing with CMHC.
We ended Q1 2023 with a debt to gross book value of 44.5% and a $1.1 billion of unencumbered assets, which positions us well to execute on our upcoming financing initiatives. We expect to refinancing -- refinance the majority of our 2023 debt maturities with CMHC mortgages at attractive rates.
I will now turn the call back to Nitin for his closing remarks.
Thank you, David. We are proud of the progress we have made so far this year. Our ongoing initiatives to generate strong occupancy and rate increases coupled with a significant reduction in agency staffing cost are reflected on the results.
We also made some efficiencies at our corporate office, which is expected to result in an annual G&A savings of approximately $3 million. As we look ahead, long-term fundamentals in Canadian senior living are stronger than ever, and we see significant growth potential in a business over the next several years. We're actively working on a number of initiatives which may contribute to a significant expansion of our net operating income.
The first one, through occupancy growth and retirement, as we continue on a path towards reaching stabilized same property occupancy of 92.5%, this represents a 430 basis point increase from a Q1 occupancy of 88.2%. Second, we expect to generate incremental NOI from the contributions of our acquisitions of the past year, as well as our retirement project in Niagara Falls, which is expected to have a 7.5% development yield.
Third, through the elimination of net pandemic expenses and agency cost, which were $8.2 million in 2022, we plan to do this by being laser focused on managing agency cost while working with governments to ensure that operators are fully funded for all cost of resident care. And fourth, through catch of funding from Ontario government to address funding shortfalls as a result of inflation in recent years. Each percentage point increase in other accommodation funding represents an annual additional $1.2 million of funding. We believe that all of these initiatives could have a considerable impact on the value of our business and should help us to grow our NOI, OFFO and improve our AFFO payout ratio in the coming years.
Our success depends on the team that is fully aligned with Sienna's purpose, vision, and values. It is a key reason for the implementation of a company-wide employee share ownership program and for redefining our purpose, vision, and values. Every day, we see amazing examples of our team members who are putting our purpose of cultivating happiness in daily life into action.
Team members such as Shannon [ph], who's at Recreation Therapist in BC, who helped the resident learn to read and ultimately helped them find happiness by becoming more socially connected to the broader community. Danielle, a resident engagement manager, who supports a pen pal program at a Kensington Place retirement residence in Toronto, which is now about 30 student volunteers writing letters to our residents. Danielle is already planning a year-end prom style get together with residents and the students. And our team members from support service in our homes who have been preparing and delivering meals for seniors in the community as part of a Sienna Sunday supper program.
I'm so incredibly proud of our team and I'm confident that together with our 12,000 team members, we will continue deliver on our purpose. On behalf of everyone at Sienna, I want to thank all of you on this call for your continued support.
We are now pleased to answer any questions you may have.
[Operator Instructions]
Your first question is from Jonathan Kelcher of TD Cowen. Please go ahead. Your line is open.
Thanks. Good morning.
Good morning, Jonathan.
First question just on the 2% OA increase. Obviously you guys are disappointed with that and I know the industry is working with the government to try and rectify that. But if we -- if you're successful on that, when would that hit -- like then the question really is, is there a chance for an increase this year, or is that something that we kind of have to wait for April 1st next year?
Sure. Jonathan, so, in the past, we have been used to being funding increases once a year, but over the last three years, government has been for most -- in most programs been quite proactive and really reacting to the needs of the time. So, BC for example, we had a funding catchup of 9% last year. And there -- the funding we find in BC is quite substantial, pretty close to inflation. And in Ontario, even the 2% funding was not appropriate. We were very pleased to see the funding on third and fourth rooms, the funding on CFS. So, we continue to feel optimistic that we will get in year funding increase because that goes to the heart of the development of thousands of beds that needs to be redeveloped in Ontario.
Okay. That's helpful. And then -- and on the third and fourth beds and the funding for that, so you guys have 350 beds. How many of those would be in homes that you plan to redevelop over the next couple of years?
Yeah. So, in North Bay and in Brantford, there would be about 50 of the beds out of the 350 that would be redeveloped.
Okay. Those -- but yeah, those are your -- that's your current development. But what about -- I'm sure you guys have a list of what's up next?
That's correct. And so really the way we are productizing these projects, Jonathan, I would say maybe in multiple roles. First is obviously, the first one for us is operational viability. So some of the homes which are much older, for example, if they're more complex operational needs, that will go first, followed by the third or fourth rooms. And then there's a reality of there are some municipalities which are easy to work with others. So, obviously, the timing of that would dictate that. But the third and fourth rooms is definitely part of our equation.
Okay. That's it for me. I'll turn it back. Thanks.
Thank you.
Your next question is from Himanshu Gupta of Scotiabank. Please go ahead. Your line is open.
Thank you and good morning. So, just sticking to third and fourth beds and the other recommendation funding will continue until March, 2025. So, is it fair to say that minimal to no impact on these homes until then?
That's correct, Himanshu. We don't expect any impact because the OA funding will continue to 2025. So, we wouldn't expect any impact until that point.
Okay. That's good. And then, overall Long-Term-Care NOI, so do you still expect 2023 NOI to be similar to last year? I mean, as mentioned by you in the -- on the last call or is there now upside to this number given the retroactive funding, which you received?
Himanshu, it's a bit too early to tell. As we talked about, like we are seeing stabilization across the portfolio. The coming off restrictions, the catchup pandemic funding, getting to nearly all of our homes speaking 97% and above. So, we are trending positively, but I think it's a bit early to commit to a different number at this stage.
Okay. And would you say that Q1 was ahead of your expectations [indiscernible]?
I wouldn't really -- I don't want to get into internal expectations versus what's there. I would say, we are pleased to see -- it's been difficult few years and I be finally seeing a bit of a positive trend on it.
Okay. Fair to say that, fair to hear that. Then just switching to retirement homes now, rental rate growth, has that accelerated? I mean, would you say that?
No, it's been pretty consistent. In U.S., the rental rates have been around 8% to 10%. In Canada, I think it's been around half of that. And we still are not caught up in inflation. So, there's definitely the intent to continue on that journey. I -- we don't see rates accelerating, but we think the rental rate should be that 4% to 5% that we have seen previously.
And this is -- the 4% to 5% is it happening across the board, or is it mostly on homes which are 85% or 90% occupied? Hello? Hey, is the…
This is the operator. Please remain on the line.
It's Nitin and David. Can you hear us okay Cheryl?
You are coming through loud and clear.
Okay. Perfect. Apologies for that. Himanshu, sorry. We were just answering your question. So the 4% and 5% rental increase, I would say in U.S., we are seeing much bigger increases. And I think a question around is it a cross on an -- it really is an average, but it's pretty consistent across.
There are no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect.