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 Q2 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 statement or information. Please refer to the forward-looking information or risk factor section in the Company's public filings, including its most recent MD&A and AIF for more information. You will also find a more post on 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, remarks on a Company website under Events and Presentation.
With that I will now turn the call to Mr. Jain. Please go ahead, Mr. Jain.
Thank you, Mark. Good morning, everyone, and thank you for joining us on our call today. There's tremendous growth potential for our Company with demand for the care and services we provide expected to rise for many years.
Earlier this year, we outlined in detail where we see the potential for expanding our net operating income, and how we believe our strategic initiatives will support such expansion. The solid financial performance during the second quarter and the positive indicators for the balance of the year, highlight that we are on the right track.
Our Long-Term Care operations benefited from a stabilizing operating environment. Average occupancy has now reached 98% in the second quarter, with occupancy exceeding the required level for full government funding at all of our homes.
Further supporting our results were annual government funding increases and funding related to prior periods as well as reduced agency staffing costs as a result of better rates and our ability to fill vacant positions through increased hiring.
Same property NOI in our Long-Term Care segment increased by 13.9% in Q2 compared to the prior year. For the second half of this year, we expect long-term care same property NOI growth in the low-single-digits compared to prior period. The operating environment has improved significantly, and we have made great strides in reducing cost where possible. We still have funding shortfalls as a result of inflation, and continue to work with other sector participants and the government to address these shortfalls.
Moving to retirement, with respect to occupancy in our Retirement segment, consistently high levels of resident move-ins and the improved performance of the 12 joint venture residences we acquired last year were partially offset by an approximately 18% year-over-year increase of resident move-outs predominantly into long-term care.
Average occupancy in the Company's same property portfolio was 86.9% in the second quarter, up marginally 10 basis points year-over-year. With the operating environment stabilizing in many long-term care facilities now at full occupancy, we expect the level of resident move-outs long-term care to normalize during the second half of this year. Same property NOI in Retirement segment increased by 4% in the second quarter, largely as a result of annual rental rate increases.
Our marketing and sales teams continue to generate strong interest in our retirement residences. Community outreach efforts such as open houses and lunch and learns with community partners, in a robust sales platform will support occupancy growth during the second half of the year. We're also providing targeted on-site sales support to homes with lower occupancy. Lead indicators have strengthened significantly during the second quarter, and qualified leads are up approximately 23% year-over-year.
We're starting to see this positive trend reflected in our current occupancy numbers. Average same property occupancy was up 10 basis points in July, and further gains are expected in August. Based on our updated occupancy forecast, we expect average same property occupancy for the full-year in 2023 to be approximately 88%. We further anticipate an approximate 100 to 150 basis point year-over-year growth in the retirement operating margins for the full-year in 2023.
Moving to slide eight, among the major improvements during the second quarter were the reduction of agency staffing costs and G&A expenses. Since the beginning of the year, we reduced the number of agencies we are working with from over 100 to less than 15 and negotiated improved contract terms such as enforcing a minimum fill rate threshold while reducing hourly rates. Year-over-year, we were able to reduce overall agency costs by approximately 40%. Filling vacancies with permanent team members rather than temporary agency staff was the key reason for this improvement. Agency staff also has a negative impact on team members morale and resident satisfaction, and we will do everything possible to further reduce our reliance on agency staff.
Our investment in an automated centralized scheduling and call out system has significantly improved our ability to fill staffing gap with our own team members before shifts go to external agency staff. It also provides tighter controls on overtime and offer insights into future staffing needs. We also reduced G&A expenses resulting from a restructuring at our corporate office. This restructuring led to a workforce reduction of approximately 10% of non-union employees at our head office. Operational efficiencies and a reduced reliance on pandemic related support were the key reasons for the restructuring which was completed in the first quarter of this year.
Moving to our team members, investments to improve team member engagement and fostering a positive workplace culture remains a priority for us. This is reflected in a number of our initiatives. In connection with our share ownership and rewards program, approximately 800 team members received Sienna shares in the second quarter. To-date approximately 63% of all eligible team members are now shareholders. We've also announced the winner of SPARK, a program that allows our team members to share ideas and how Sienna can grow and improve.
We received nearly 170 ideas during the first round of submissions, violated eight of them and ultimately identified four inaugural winners. Their ideas range from reducing food waste, enhancing resident engagement, improving the hiring process of new team members. We look forward to implementing some of the best ideas across our operations.
Building a talent pipeline for the future is crucial in our sector, which remains extremely competitive. As part of a talent acquisition strategy, we have improved our onboarding process and have enhanced our campus recruitment campaigns at key universities and colleges. We had placed approximately 460 students at our residences in the second quarter and hope to hire many of them once they graduate. We also believe that the appeal of our purpose, vision, and values differentiate Sienna and helps us attract and retain a highly engaged workforce in a competitive recruitment market. Our recruitment initiatives have earned us the recognition for having the Best Talent Acquisition Team in the Health and Wellness category by LinkedIn Talent Awards. This is a testament to the strength of our recruitment team.
Moving to development. Our strategy of owning a diversified portfolio of pay retirement residences and public funded Long-Term-Care communities is reflected in our development initiatives in Ontario. We currently have $275 million of development projects under construction with a development project in Niagara Falls, scheduled to be completed in the fourth quarter of this year. Pre-leasing activities for 150-suite retirement residents have been strong, and we expect the first residents to move in later this year.
In addition, construction of our Long-Term Care community in North Bay with 160 long-term care beds and our Campus of Care in Brantford comprising of 160 long-term care beds and 147 retirement suites is fully underway. Once all three projects are operational, that are expected to lower Sienna's AFFO payout ratio by mid-to-high-single-digits and will further add to the long-term stability of our cash flow and dividend.
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 on slide 13, for financial results.
In Q2 2023, total adjusted revenues increased by 10.1% year-over-year to a $198.3 million. This increase was largely due to rental rate growth and additional revenue from a full quarter of contributions from the 12 joint venture property we acquired in Q2 2022, in our Retirement segment as well as flow through funding for increased direct resident care and annual inflationary funding increases in our Long-Term Care segment. Total net operating income increased by 13.7% to $38.9 million this quarter, compared to Q2 2022, mainly due to same property NOI growth, a full quarter of contributions from 12 joint venture retirement residences as well as the acquisition of Campus of Care in Q1 2023.
Same property NOI in our Long-Term Care segment increased by 13.9% to $20.5 million in Q2 2023 due to a more stabilized operating environment and lower net pandemic expenses, which included a retroactive funding adjustment including $1.4 million for expenses including $1 million incurred in Q1 2023 and $400,000 incurred last year.
Our retirement same property NOI increased by 4% to $16.6 million in Q2 2023 compared to last year, primarily as a result of rate growth, improved performance of the 12 retirement properties acquired in Q2 2022, partially offset by an elevated level of resident move-outs to long-term care during the first six months of the year. Starting this June, occupancy and operating results of our 50% share in the 12 retirement residences have been reflected in our same property results.
Moving to slide 14. During Q2 2023, operating funds from operations increased by 24% to $21.4 million compared to last year, primarily due to higher NOI and lower general and administrative costs, as a result of the restructuring in Q1 2023, offset by higher interest expense. OFFO per share increased by 24.1% to $29.4 in Q2 2023.
Adjusted funds from operations increased by 14.1% to $19.6 million compared to last year. The increase was due to a higher OFFO offset by higher maintenance costs and a decrease in construction funding income. AFFO per share increased by 13.6% to $26.8 in Q2 2023. In-line with our strong results, we were able to significantly improve our AFFO payout ratio, lowering it to 87.3% in Q2 2023. This was an 11.9% point decrease compared to a year ago.
With respect to our debt metrics, we lowered our debt to annualized adjusted EBITDA to 8.0 times in Q2 2023 from 9.2 times in Q2 2022, and increased our interest coverage ratio to 3.5 times from 3.4 times a year ago. We also maintained ample liquidity of approximately $276 million as at June 30, 2023. And in addition, we paid off the remaining balance of our unsecured term loan during the quarter and entered it into low cost mortgage financing with CMHC. At this time, we have no major debt maturities until the fourth quarter of 2024.
We ended Q2 with a debt to gross book value of 44% and $1.1 billion of unencumbered assets. Our solid balance sheet and limited debt expires over the next 15 months positions us well to execute on our strategic initiatives.
With that, I will now turn the call back to Nitin, for his closing remarks.
Thank you, David. Our strong second quarter results combined with the flexibility of our solid balance sheet and ample liquidity gives us reason for an optimistic outlook for the second half of the year.
Our Long-Term Care segment has virtually returned to full occupancy and we expect full occupancy levels during the second half of 2023. And our retirement portfolio is showing occupancy growth in July with continued improvements anticipated for August, indicating a steady increase during the balance of the year. In addition, rate growth were further supported our retirement results.
We also achieved a number of operational efficiencies, which are adding to the resilience of our business. Successfully reducing agency staffing costs and G&A expenses have been key drivers of the strong 2nd quarter results. Our success depends on our team members and their alignment with Sienna’s purpose, vision and values. It was a key reason for the implementation of our company-wide employee share ownership plan, our SPARK program and our focused on improving two way communication, all of which helped to foster a positive workplace culture.
Every day, we see amazing examples of the impact our team members have on the quality of life and well-being of our residents. Some of the inspiring examples are highlighted in our most recent ESG report. Team members like Jennifer, our Community Relations Specialist in BC, who fulfill the resident's dream to attend a Powwow with her family and friends in Kamloops. This involved a collaboration of two of our communities to ensure the resident would be able to travel safely and have her care needs met.
I could not be prouder of a team member's efforts creativity to cultivate happiness for residents, and I feel fortunate that I often get to witness this firsthand during my visits to our homes. These days when I stop by, team members also want to talk about our Company's financial performance. They ask questions about Sienna’s results and stock price because they are now owners of the Company. With many of them having become shareholders for the first time to our share ownership and rewards program. We also provide financial literacy education which has now become an additional benefit of the SOAR program.
I am confident that with together 12,000 team members we will continue to seize the growth potential for our Company and drive results. On behalf of everyone at Sienna, I want to thank to all of you on this call for your continued support.
We're now pleased to answer any questions you may have.
[Operator Instructions] Your first question comes from the line of Jonathan Kelcher with TD Cowen. Jonathan, your line is now open.
Thanks. Good morning.
Good morning.
First question, just a little surprised on the pull-back in occupancy in the quarter. Were there any on the retirement side? Were there any specific markets that occurred in?
Hi, Jonathan. Good morning. There's really no specific market for this. It really was driven mostly by moving into long-term care. And we already have seen the trend reverse. For example, when you look at the June year-to-date move-outs, our July is running around 10% below that move-out rate, and our August is running the -- really the same number.
So, it's across the market. And it really -- and we had for the first time in four years, long-term care homes were not full. So, and that now we find across the sector has been corrected.
Okay. So is it like, I would guess typically people, a lot of people would move-out to go into long-term care. Is it sort of normalizing back to pre-pandemic levels? And this is just sort of a hiccup because there is some extra space.
That's correct. So, if you remember, we were -- in Q1, we had some homes, which are not fully occupied. Across the sector, some homes were not occupied. So, I think the second quarter is when there were a lot of people who were waiting to go into long-term care, which eventually did go to long-term care. So, that -- it really was driven by that.
Okay. And then the 88%, occupancy target, that's just to confirm, that's the average for the year?
That's correct.
Okay. And then lastly, just on the agency costs, nice to see them down so much. Are they – do you expect them to be back to sort of pre-pandemic levels for 2024?
I would say, Jonathan, what I said in my script, we’ll do everything in our power to reduce agency staff. It is not good for team members. It is not good for residents, and it's not good for us financially. So, our focus is not going back to pre-pandemic level. Our focus is to go as close to zero as possible, which zero is not possible because you always need agency support, but our goal is to be as close to zero as possible.
Okay. And how would you -- how's 2023 comparing to pre-pandemic level?
Yes, Jonathan. So, compared pre-pandemic levels, we're actually running fairly close to pre-pandemic levels at -- we incurred $6 million in Q2, and that would have been fairly close to pre-pandemic levels.
Okay. That's helpful. I'll turn it back. Thanks.
Your next question comes from the line of Himanshu Gupta with Scotiabank. Himanshu, your line is now open.
Thank you, and good morning.
Good morning.
Just on retirement home occupancy, I mean, your target is around 88%. And I mean, as you look into next year, where do you think the stabilized occupancy can be for your portfolio?
Himanshu, we expect our forecast for stabilized hasn't changed. It really is around 92% to 95%. And we have multiple homes, which are at 100% occupancy. We have many homes, which are above 90%, close to more than half of our portfolio is in fact over 90% currently. So at this stage, we're not ready to give the forecast of 2024, but we expect stabilized to be 92% to 95%.
Got it. Fair enough. And then how are the annual rate increases trending. I mean, with this, a bit moderation in occupancy in the last few months, have that changed anything in terms of how much rent growth you are pushing in the system?
No. So, we are steadfast that we will not be discounting to, we are not going to buy occupancy. We'll continue to provide initiatives whether its move-in expenses, getting a free TV, giving half a month rent free so, but we are not looking to reduce our rates, because that has a significant impact long-term on the margins in this sector.
Okay. Would you say, you're still doing, like, 4% to 5% that decreases, or is it higher or lower than that?
Yes. Himanshu, we started implementing, rate increases close to 5% starting Q4 of 2022. And we continue to roll out those rate increases across all of our homes.
Awesome. Thank you. And maybe, just turning to LTC on the long-term care side, and David, I think there was $1.4 million retroactive funding. Do you have visibility in how this will shape out in the coming quarters here?
Yes. So, you're right. We did have $1.4 million of retroactive funding. It was related to prior periods in Ontario. We're pretty much complete with our retroactive funding and we don't expect any additional funding in the province of Ontario. In BC, they're about a year behind. So, we may get some retroactive funding there, but the timing and the amount are uncertain at this point.
Got it. And maybe just last question, again on LTC guidance. I think your guidance kind of implies mid-single-digit on full-year basis in 2023. But if I look at the NOI, this is still, like, call it 15% below pre-pandemic levels. So, is that how it's going to run in the near future? Do you expect anything happening there to bridge the shortfall there?
You're right. Himanshu, our results are better versus last year, because last year was, I would say, probably the bottoming out of long-term care financial performance. We continue to have a significant funding shortfall because funding has not kept up with inflation. We continue to work with government that sector partners with our association to really stress the importance of viability of this, because we need to build thousands of new beds in Ontario. And that is not going to be possible unless the funding is fixed. So, we continue to be optimistic that there would be a viable funding program. And we have no expectation to be running 15% to 20% below 2019 levels.
Got it. Thank you, guys. I’ll turn it back.
Thank you.
Your next question comes from the line of Tal Woolley from National Bank Financial. Tal, your line is now open.
Hi, good morning.
Good morning.
Just to pick up on Himanshu's questions about LTC profitability going forward, your outlook statement said, you're looking for low-single-digit increases over the prior year in the back half. I cannot, at this time, off the top of my head, remember all -- any of the puts and takes and the numbers last year. Are you talking about low-single-digit over the reported NOI or the adjusted NOI?
Yes, we're talking about the off of the total NOI for Long-Term Care. And that would be -- that would include our net pandemic expenses.
Got it. Okay. And then in your outlook for the retirement side, you cited or you are looking for 100 to 150 basis points, that's down a little bit from where we were at the start of the year. Is that purely a function of the occupancy change or are there anything else in the cost structure that's shifted a little bit?
Yes. The decline in our guidance is really because of the lower occupancy targets that the 88% for the full year average. We continue to believe that we will, have margin gains as a result of our rental rate increase exceeding our operating expense increases.
Okay. And then just across the broader landscape for retirement. Would you say like competitive intensity right now is higher than it's been, lower than it's been. I could see the industry maybe, as people have sort of gotten back to a more normal pace of living this year, like, maybe are easing off a little bit because it feels like the demand is finally coming back to the industry, or is it still quite high just because everyone's still scraping and trying to get ahead coming out of the pandemic?
The market really hasn't changed. The sector is pretty sophisticated in terms of not trying to reduce rates too much upfront because that can have multi-year impact because you can -- your ability to increase rates when people come in is quite limited. So, I would say the competition continues to be the same and so really, not really much change.
Okay. And, the same regions are still the ones that are, the toughest like the Ottawa or the Ottawa area during region, those are still the ones with the -- that remain the most competitive out there?
That's correct.
Okay. And then I guess just lastly, how have you found, like, recruitment efforts? Is it getting easier to hire people? Is it still a big challenge? I'm just wondering as, the post pandemic economy is one thing. We're looking at maybe a different a different or a softening outlook, going ahead. How is recruitment interest changed?
So, it has definitely got better from the last two, three years, but you say it's simple would be a big understatement. So, it's simpler compared to the last two years, as things have settled down. The toughest role continues to be nurses, and which will take a bit of time to fix even as you get foreign trade nurses because there's a bridging program and all point of visa issues, which come into play as we get people -- international nurses come into Canada. But we do expect knowing that the provincial government, the federal government, there's a big focus on fixing that. So, I would say we should start to see some relief in it, over the next 12 to two years -- 12 months to two years.
Okay. That's perfect. Thank you very much, gentlemen.
Thank you.
Thank you.
There are no further questions at this time. And this concludes today's conference call. You may now disconnect.