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 Q4 2017 Conference Call. Today's call is hosted by Lois Cormack, President and CEO; 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 in the 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 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 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 website under Events and Presentations.With that, I will now turn the call to Ms. Cormack. Please go ahead, Ms. Cormack.
Thank you, Andrew. Good morning, everyone, and thank you for joining us on our Q4 call this morning. I am pleased to report that Sienna had an excellent year with strong financial results and significant growth. We are delighted with the recently announced portfolio acquisition and expect Sienna's retirement net operating income to increase to 44% on a full year basis, up from 28% in 2017. This acquisition is expected to be transformative for the company as we are now well on our way to achieving 50% contribution from the retirement segment. I am also pleased that Sienna was honored for its corporate culture with a prestigious national award, of which our team is very proud.Guided by our mission of helping residents to live fully every day, we have made significant progress on Sienna's strategic priorities, which are growing the company, maintaining a strong balance sheet and enhancing our operating platform.The Sienna team has continued to deliver strong operating results in Q4. Same-property net operating income grew by 3.8%, which was driven by 8% growth in Retirement, 2.3% in Long Term Care and 2.4% in Baltic. In the fourth quarter, Sienna's diluted OFFO per share of $0.34 is up 7.9% from the previous period, and diluted AFFO per share of $0.33 is up 2.8% from the previous year period. Sienna has continued to strengthen its balance sheet and ended the quarter with a debt-to-EBITDA of 7.4x and an interest coverage ratio of 3.7x.Now moving on to Slide 7. Sienna's operations team continued to achieve consistent occupancy in our retirement residences, finishing the quarter with overall average occupancy at 93.2%. Total net operating income from retirement was up 25.3% over the prior year period, of which 17.3% was related to strategic acquisition and 8% was due to same-property growth.Moving to Slide 8. Long Term Care and Baltic results continue to have high occupancy levels. Q4 '17 average occupancy for Long Term Care was 99%. Q4 '17 average occupancy for Baltic was 96.2%. These occupancy levels are supported by very long waiting lists in both provinces.Subsequent to the quarter, we were very pleased to announce that Sienna is growing once again, having entered into an agreement to purchase 10 high-quality retirement residences in Ontario for a total purchase price of approximately $382 million. The 1,245 private paid suites include independent, supported living and assisted living.We are looking forward to welcoming the residents and nearly 800 new team members to the Sienna team. We expect to close this transaction in the second quarter of this year and to see the pro forma retirement net operating income mix increase to approximately 44%. This acquisition will expand Sienna's retirement footprint into new and desirable communities. We will further enhance the company's growth profile and drive long-term value creation for shareholders.As previously announced, we have also completed the purchase of the Waterford Barrie and Kingston Retirement Residences in the fourth quarter of 2017. The residences are now integrated into Sienna's operating platform.Turning to Slide 10. We were extremely pleased and honored to be named one of Canada's Most Admired Corporate Cultures by Waterstone Human Capital. This prestigious award recognizes Canadian organizations for having cultures that enhance performance and help to sustain a competitive advantage. Sienna won this award in the Enterprise category along with an impressive list of companies. The award is based on criteria that include vision and leadership, cultural alignment, organizational performance and corporate social responsibility.I will now turn the call over to Nitin for further details on Sienna's financial results.
Thank you, Lois, and good morning, everyone. I will start on Slide 12. Net operating income for the fourth quarter of 2017 was $30.5 million, which represents an increase of 11.3% or $3.1 million compared to the same period last year. Net operating income for the full year 2017 was $118.1 million, which represents an increase of 20.8% or $20.3 million compared to the same period last year.Same-property NOI for the fourth quarter of 2017 increased by 3.8% or $1 million over the same period last year. And on a full year basis, same-property NOI increased by 3.7% or $3.6 million. The company's Retirement division achieved strong organic growth, generating same-property NOI of $7.7 million, a growth of 8% or $0.5 million over Q4 2016. This was driven by rate increases and disciplined cost management. And on a full year basis, same-property NOI for retirement increased by 10% or $2.6 million.Sienna same-property Long Term Care NOI for Q4 2017 increased by 2.3% over the same period last year to $16.6 million. This was driven by the timing of expenses during the quarter. The full year Long Term Care NOI growth is 1.4%, which is more indicative of this business.Sienna same-property Baltic NOI for Q4 2017 increased by 2.4% over the same period last year to $4.5 million, primarily due to timing from annual funding increases. Beginning with our Q1 reporting, Baltic will be merged with Long Term Care to become the Long Term Care Residential Care segment. These businesses are similar and share a common operating platform.Moving to Slide 13. In the fourth quarter 2017, diluted OFFO per share of $0.34 is up 7.9% since the same period in 2016, and diluted AFFO per share of $0.33 is up 2.8% since the prior year. On a full year basis, diluted OFFO per share of $1.32 is $0.06 or 4.7% compared to 2016. Moreover, full year 2017 diluted AFFO per share of $1.43 is ahead of prior year by $0.03 or 2.1%.Executing on Sienna's debt strategy, at the end of Q4 2017, Sienna's debt to gross book value was 49.6%, which is 190 basis points below fourth quarter 2016 metrics. Included in Sienna's debt is approximately $44 million of convertible debentures. And on a fully diluted basis, the company's debt to gross book value would be 46.9%.Sienna ended the fourth quarter with approximately $97 million in undrawn credit lines and cash. The company continues to solidify balance sheets. For Q4 2017, Sienna's debt-to-EBITDA has declined to 7.4x from 7.9x in the prior period. Additionally, Sienna's interest coverage ratio for Q4 2017 has increased to 3.7x compared to 3.6x in the prior year.Now moving to Slide 11 (sic) [ Slide 15 ]. The pending $382 million acquisition is a tremendous growth opportunity for Sienna. To partially finance the acquisition, Sienna launched a $160 million bought deal public offering of common shares, which closed on February 9, 2018. Sienna's public offering also includes an over-allotment option of 15%, which is exercisable in whole or in part any time prior to the 30th day following the closing of the offering.Sienna will be assuming approximately $76 million in existing mortgages at a weighted average interest rate of 4% and a weighted average final maturity of 6.3 years. In addition, Sienna intends to enter into a $163 million acquisition term loan facility that the company expects to repay post [ final ] -- post-closing. Following the closing of the acquisition, the company's debt to gross book value is at -- expected to be approximately 52%, which on a fully diluted basis would be approximately 50%. We are working diligently on closing the transaction and based on our current progress, we anticipate closing early in the second quarter.With that, I will turn the call back to Lois.
Thank you, Nitin. Looking ahead, we believe the outlook for Sienna is very strong, and we expect to continue the progress that we have made on our strategic priorities. We continue to make enhancements to our operating platform that improve the support to the teams in our owned and managed properties. We anticipate consistent performance from the funded part of the business and moderate single-digit growth from Retirement.Sienna continues to progress on its development plans, and we are very pleased with the Government of Ontario announcement to add 5,000 new long-term care beds by 2,000 -- by 2022. The application process to apply for these new beds is now announced, and we are currently in the process of applying for a number of projects.During the fourth quarter, the company received preliminary approval to proceed with the redevelopment of 2 sites. Both projects are greenfield and construction is expected to begin in 2019. In addition, during Q4 2017, Sienna proceeded with the previously announced expansion of Island Park in Campbellford with the addition of over 50 suites and amenity space. We expect a development yield of approximately 9% for the project and expect it to be completed in 2019 followed by an 18-month lease-up.On the acquisition front, our first priority is to integrate the recently announced portfolio into Sienna's platform. Having said that, we will continue to be strategic and disciplined in our approach to acquisition and believe that the tremendous effort to date on strengthening our operating platform has positioned us very well for future growth in key markets in Canada.As demonstrated in the recently announced portfolio acquisition, our strategy is to continue expanding the Retirement portfolio to 50% of the company's business. We are honored to be recognized as one of Canada's Most Admired Corporate Cultures along with several of the country's most successful companies. With our focus on our strategic priorities, we expect to continue to deliver earnings growth and long-term shareholder value.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 the line of Fred Blondeau with Echelon Wealth Partners.
Three quick questions for me. First, how much time do you think it will take to integrate the Toronto and Ottawa acquisition?
So -- well, thank you and good morning. We expect that 2018, we will really focus on integrating this acquisition into the Sienna platform. It's 10 retirement residences, all well-located, and it will take some time. So we're going to really focus on this for -- it will take the -- a good portion of the year.
Okay. And now that private pay represents 44% of your NOI, which is above your objective of 40% mentioned last quarter, will the growth strategy remain focused on private pay from here?
Well, our growth strategy, right now, we'd like to get to 50% Retirement, but we also have growth, as I mentioned, in Long Term Care. We have a number of projects that we'll be proceeding with, a couple have been approved and we have others that we're applying for.
Okay. And lastly, on the internal growth opportunities, you just mentioned that 9% yield on -- in Campbellford. Can you gave us a sense of what kind of yield are you looking for in Stouffville? And should we expect this kind of yield down the road?
So the 9% yield is an expansion project where there are a lot of synergy with the existing building. Our previous guidance on projects is for Long Term Care because the risk is much lower in terms of lease-up there because the home is essentially leased up the day it opens. We are looking for around, call it, 50 to 100 basis points over cost of capital for the Long Term Care portion. But for Retirement, it will be 100 to 200. But as we have talked about before, our goal is to really create campuses. So on a combined basis, for both Long Term Care and Retirement, you can expect the overall project to be close to 100 basis points [ over a lower ] cost of capital.
And our next question comes from Jonathan Kelcher with TD Securities.
Congrats on the Waterstone award.
Thank you.
First question, I guess it has been a more difficult flu season so far this year. Are you expecting much, if any, impact on Q1 occupancies?
Yes. Well, November, it actually -- the flu actually starts in November. And what we're finding this year in Long Term Care and in Retirement across the country is that it's a ferocious flu that just keeps coming back. We have homes in outbreak and then we find that they go back into outbreak, which is usually -- which is very unusual. Usually, it's once and that's it. So yes, it is -- we -- it came in November and it -- we're still experiencing it now. So there will be some impact as we usually find this in the winter season because there's a combination of that as well as seniors not really wanting to move in, in the winter months.
Okay. So year-over-year in Q1 occupancy and property occupancy is probably down a little bit? Is that fair to say?
Again, it's -- we ended the quarter on [ then out ] kind of as-at occupancy was around 92.3%. And again, as Lois pointed out, Jonathan, a lot of it is -- it's a combination of 2 things. It's the flu season. And also, as you know, we acquired 2 big properties, the Waterford Kingston and Barrie, and one of the properties in lease-up. So we ended the quarter with 92.3%, and with where we see the flu season, I mean, the Q1 would be similar. We expect similar results where we ended the year.
Okay. Secondly, on the mortgages that you have to do for the acquisition, $163 million, what sort of rates are you seeing right now? And how does that compare as to when you sort of made the decision to go with this acquisition?
So really for us, we are looking to lock in long, 8 years plus in terms of the new rates. So even with the 3 recent changes, the long term -- the 10-year rate hasn't changed -- by at 75 basis points, it's much more modest than that. So nothing fundamental has changed in our underwriting when we first started versus where we are today. But obviously, it will take us some time to put that financing into place, and we're looking at different ways to hedge our interest rate risk on any of the upcoming financing or the financing that we'll do for this acquisition. So at this point, we don't see any material changes to our assumptions. But again, we'll see what the interest rate environment brings us in the future.
Okay. What were those assumptions?
Roughly, we think around 3.8%, 3.9% as an average interest rate for the overall portfolio. What we acquired was around 4%. And our goal is to look at CMHC debt and conventional debt, and CMHC debt tends to be obviously a bit more economical than conventional debt. So we expect that the overall interest rate on the portfolio when we are fully done will be below 4%.
Okay. And then just lastly, with the big acquisition, what do you expect the impact to be on cash taxes for 2018?
So the cash taxes for 2018, I think [ our peered ] the assumption would be roughly between $8 million to $9 million for the year.
Spread pretty evenly?
Sure.
[Operator Instructions] Our next question comes from the line of Michael Smith with RBC.
I'm just wondering, with your most recent acquisition and I know you're not at your total target for Retirement, but does it give you a little more flexibility to buy LTC? Or is that just not really of interest unless it was a very unusual situation?
Yes, I don't think -- we're really focused in terms of our LTC strategy. It's more on the redevelopment projects, Michael. We've got a couple that have been approved that have started the process. We're applying for a number of others with the -- to top off beds with other redevelopment projects with the new licenses that have just been announced. So that really is our focus. If we -- we are also interested in campuses. So anything that comes with both retirement and a funded model is also attractive to us.
Okay. And with the election coming up this year in Ontario, any chatter or any changes to the funding model, the rebuilding model that -- any chatter about that or...
No, there has been none that we're aware of.
And I'm showing no further questions. So with that, I'd like to thank everyone for their participation in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.