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 2018 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 statements or information.Please refer to the forward-looking information in the Risk Factors section in the company's public filings, including its 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 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 & Presentations.With that, I would now turn the call over to Ms. Cormack. Please go ahead, Ms. Cormack.
Thank you, Kyle. Well, good morning, everyone, and thank you for joining us on our Q4 call this morning. In 2018, we made significant strides in executing our growth strategy and transforming the business. We acquired nearly $400 million in high-quality retirement residences, our company was added to the S&P/TSX Composite Index and we increased the monthly dividend payment to our shareholders by 2%. Our fourth quarter and full year results highlight these milestones and reflect the contributions from our 12,000 dedicated team members. Total net operating income grew by 27.5% from Q4 in 2017. Q4 same property NOI growth was 5.6% in Retirement and 1.3% in Long Term Care. In the fourth quarter, Sienna's diluted OFFO per share increased by 3.5% from the prior period to $0.36 due to same property growth and accretive acquisitions. We have continued to strengthen our balance sheet and ended the quarter with a debt-to-gross book value of 47.7%, which is 190 basis points below the fourth quarter of 2017. I'm moving to Slide 8. In our Retirement same property portfolio, average Q4 occupancy was 93.2%. This was in line with prior year results. Same property net operating income in Retirement grew by 5.6% in the quarter and 5.4% year-to-date compared to 2017. Over the past year, we have strategically grown our Retirement net operating income mix up to 44% of the overall business. This was an increase of 15 percentage points from the prior year. With this, we are optimistic about our ability to meet or exceed our strategic goal of Retirement representing 50% of the overall NOI mix. Because of our strategic portfolio acquisition in 2018, we have spent a considerable amount of time on integration efforts, which are progressing as expected.Now turning to Slide 9. Average occupancy in the Long Term Care portfolio remained high at 98.5% for the quarter. Same property net operating income grew by 1.3% in the quarter and 1.6% year-to-date, which is in line with expectations. Resident and family satisfaction continues to be a priority at Sienna and we were delighted to have received scores over 80%. We remain focused on Sienna's people strategy and team culture, and we are investing in new ways of attracting, recruiting and retaining talent. We are proud that Sienna team members were once again recognized for leadership excellence with a total of 22 nominees at provincial award ceremonies in British Columbia and in Ontario. We are investing in our marketing campaigns to drive prospects to Sienna residences in their local community, and we have had an active influenza vaccination and prevention campaign in Q4 in an effort to minimize the severity and duration of the flu season.Now turning to Slide 11. We expect demand for senior living to remain strong as the number of Canadians aged 80 and over is projected to increase on average by about 3% annually over the next 5 years and growing 4% annually thereafter. Development of seniors' living communities are key components to meet this increasing demand. Although we expect the demand for senior living to remain strong, we have seen some levels of temporary oversupply in certain areas such as the Ottawa and Durham region. We believe that our geographical diversity and industry-leading platform positions us well as the market is adjusting to the growing supply and demand, and we remain highly optimistic about our future growth prospects.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 13. Net operating income for the quarter grew by 27.5% or $8.4 million compared to the same period last year for a total NOI of $38.9 million. The Retirement division generated same property NOI of $9.5 million, an increase of 5.6% over the prior year. This was driven by a combination of market rate adjustments and rate increases and operational efficiencies. For the full year, Retirement NOI has grown by 5.4%. Sienna same property Long Term Care NOI for the quarter increased by 1.3% to $21.8 million. Full year Long Term Care same property NOI growth of 1.6% includes a onetime $400,000 rate reduction in employer premium due to medical services premiums in BC being phased out and replaced by new employer health tax effective in 2019. Moving to Slide 14. Diluted OFFO per share increased by 3.5% to $0.36. And for the full year, it increased 6% to $1.40 over 2017. This was driven by income from accretive acquisitions completed since Q4 2017 and current strong operating results. Diluted AFFO per share was $0.33, which is up nearly 1% over the prior year. And for the full year, it was $1.44, an increase of approximately 2.5% over 2017.The [ AFFO ] benefited favorably from lower cash taxes in the year due to the increase in interest expenses, transaction cost and tax depreciation associated with the portfolio acquisition during 2018. In the wake of considerable amount of volatility that the security markets experienced in 2018, in 2018, we provided investors with a stable and growing dividend by maintaining a low payout ratio of 63% as our business fundamentals continue to stay strong.Now moving to a strong financial position. The continued strength in our balance sheet at the end of the fourth quarter, Sienna's debt-to-gross book value of 47.7% finished 190 basis points below prior year period. Sienna's debt to EBITDA declined to 6.9x in the quarter compared to 7.4x in the prior year period. The company's fourth quarter interest coverage ratio continued to strengthen to 3.8x compared to 3.7x in the prior year period. Sienna's strong balance sheet enabled the company to refinance maturing debt with favorable rates and longer term maturities in 2018. In 2019, we anticipate to refinance over $90 million of property level debt on favorable terms as the company continues to focus on optimizing leverage and managing refinancing risk by creating a balanced 10-year debt maturity ladder. We ended the fourth quarter with approximately $125 million of 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. In 2018, we made significant strides in executing our growth strategy of building a balanced portfolio of high-quality retirement and stable long term care residences. Looking ahead, we believe the outlook for Sienna is strong, and we expect to continue the progress that we have made on our strategic priorities: growing the company, enhancing our operating platform and maintaining a strong balance sheet. Our focus on these priorities should continue to translate into long-term accretive growth for Sienna shareholders. Organically, we are expecting moderate single-digit NOI growth from the Retirement segment in 2019 through rate increases and operational efficiencies. With respect to Long Term Care, we are expecting consistent performance in 2019 similar to 2018 after excluding the onetime benefit. On development, the expansion of Island Park is on track, expected to be completed mid-2019. We continue to be optimistic about the opportunities to advance our Phase I development strategy of renewing over 1,000 older long term care beds and adding 500 additional retirement suites. We will further 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 that complement our existing platform as we continue to expand our Retirement platform.Thank you for your participation on the call today. Nitin and I will be pleased to answer any questions that you have.
[Operator Instructions] Your first question comes from the line of Chris Couprie from CIBC.
I just want to touch on your mid-single-digit organic growth outlook for the Retirement home portfolio. Just wondering if you could maybe give some details as to the breakdown of that between the same property portfolio as well as the acquisition portfolio. You kind of commented that occupancy was way down a little bit in the quarter in the acquisition portfolio.
Sure, Chris. So I think maybe a few ways to answer your question. The first one is everything is going to become same property after the end of this quarter, so everything really would be same property going forward. The same property, as you know, because of the size of that portfolio, the margins will be a bit lower. So just from a margin perspective, for example, on our same property this year, our margin expanded, from close to 46% to 46.5% in same property. So we had some margin uplift this year. So same progress on that for the same property portfolio. On the transaction, the thing that Lois and I talked about previously was that it will take us a year to bring it up onto our platform, so we have seen a bit of our occupancy decline in that portfolio because when we first acquired the portfolio, the severity or the acuity level was a little bit higher than what we would normally have, as we expected, doing our due diligence. So as we are -- as those people are turning over and we bring in the right level of residence in it, they will obviously stay longer and we expect our occupancy in that portfolio to also tick up. So maybe to answer your question in 2 parts: for same property will be annual rent increases, rate increases on turnover and continued operational efficiencies and for the portfolio, it would be focused on occupancy.
Okay. So on the acquisition portfolio, is it fair to say that over time you could see it achieve occupancy levels consistent with the same property portfolio, the old same property portfolio?
I think that's market specific, Chris. Generally, I think, yes, in some markets like Ottawa, there's going to be continued headwinds in that market, given that it's already oversupplied and there continues to be new supply coming on.
Your next question comes from the line of Brendon Abrams from Canaccord Genuity.
Just in terms of the Retirement occupancy, are you seeing any differences between your portfolios in Ontario and BC? And I guess the other question being has the impact specifically in the greater Vancouver area had any pronounced impacts on your portfolio there?
On the first -- I'm sorry, I don't know if I understood the second part of your question in Vancouver.
Sorry the housing slowdown -- in greater?
The housing slowdown. No. I guess, the first question about the difference between BC and Ontario, I think occupancy is a little stronger in BC. Again, market-specific or community-specific. And I would say no, we've not seen any impact from the housing slowdown in BC. There's been no direct impact on our residences.
Okay. And just in terms of SP NOI, it's pretty healthy throughout the year. What type of increases are you able to achieve on rent on both, I guess, specifically on turnover?
I guess, again, that's market-specific depending on occupancy and supply in the market and so on. Typically, it's around 3%. We may be able to get higher than that in some markets, certain suites and so on. We look at it on a market-by-market and suite-by-suite basis.
Okay. That makes sense. Here in Ontario, it's been several months now that we've had a new provincial government. I guess from your conversations and any public announcements from government officials, do you anticipate any material changes to the regulatory or operating environment for LTC here in the province? And if so, with any positive or negative implications? Or do you think it will be very much the status quo?
I think any conversations we've had, certainly, the direction with respect to reducing red tape and the need for Long Term Care services is a solution to the hallway medicine problem, we think that any policy direction is very favorable. In fact, there's already been a number of very favorable changes just in terms of -- with respect to clarifying the Bill 148 language, and there's been a number of efforts to reduce red tape. So we think that any policy direction is going to be favorable.
Your next question comes from the line of Jonathan Kelcher from TD Securities.
First off, just -- we're hopefully most of the way through flu season. I think, Lois, you talked a little bit about your programs with regard to that in your commentary. Could you maybe compare this year's flu season, the number of outbreaks versus the last couple of years?
We would say, this year, it seems to be -- well, certainly I could say, milder than last year. I don't know that we're through it. Usually, it starts at the end of Q4. We did have a number of residences that did have an outbreak in Q4. I think what we've found is that they're not as prolonged as in the previous year. And we're not sure whether that's just the strain or also in addition to all the preventative work that our team does to reduce the duration of the flu. So it usually goes well into right to the end of Q1 so I don't think that we're out of it yet, that we may still see some impact.
Okay. But so far so good relative to last year, it would be fair to say?
Yes, so far from what we've experienced. it's not as -- the duration isn't as long when there is a flu in one of the residences.
Okay. And just for Nitin, the cash taxes were a little bit lower in Q4, and I guess the G&A lower relative to me, anyways. But can you maybe give us a little bit of guidance for 2019?
Sure. So the cash taxes, when we started the year before we did the acquisition, our guidance was cash taxes would be in the range, close to $8.5 million. We ended the year with around $7.6 million for the whole year so we were around $1 million lower, mostly driven because of the transaction costs. For next year, we expect the range to be on $8.5 million to $9.5 million so that's the range for cash taxes. From G&A, I think the right way of looking at it is probably a bit of combination of 2017 and '18. So 2017, our G&A as a percentage of revenue was around 3.7%. In 2018, it's around 3.2% because when we closed the acquisition, it took us a bit of time to ramp up and fill those roles. So 2019, we expect it to be a bit of the midpoint between 2017 and 2018. So some synergies with a size from the 2017 numbers and obviously since we have done the ramp-up for the 2018, thinking of those roles now would be -- a lot of the people cost would be ongoing on an annualized basis. And the last one, just -- I know the question wasn't about maintenance capital but since we're providing a bit of color, for 2018, our maintenance capital expenditure as a percentage of revenue was around 1.4%, and we expect 2019 to be similar as well.
Okay. So G&A, around 3.5% then?
That's correct.
Your next question comes from the line of Pammi Bir from Scotia Capital.
Just can you maybe comment on what you're seeing in the acquisition market in terms of the volume of assets out there? And any change in the composition of buyers in terms of who you're seeing at the table?
Well, I don't -- there's not -- we haven't seen a lot of activity in terms of potential transactions. In terms of the universe of buyers, I think there's always -- we're seeing new sources of capital and interest in the sector all the time. I think in Long Term Care, there's a significant amount of interest from infrastructure-type investors as well as growth of smaller regional providers. So there's definitely more interest in Long Term Care, I think both in C and in A class properties across the country and in Retirement, there's -- again, there's lots of interest in different sources of capital. And in terms of opportunities, I think there's always opportunity. It's just what's -- from our point of view, it's what's right for us, but there's definitely opportunities out there.
Right. And it sounds like with the integration of Baybridge, of that portfolio going pretty well and I guess you're getting towards -- it sounds like maybe towards the tail end of that process, I suppose by the end of, say, the first half of this year. So are you feeling a little more confident that if the right opportunity surfaced in the next, call it, a quarter or so or a couple of quarters, would you be prepared to put some capital to work for an acquisition of size?
Yes. I think we're always -- I think what's most important to us is that it's strategic, that it's accretive, even if it's not an immediate term but it's accretive, while we can add value to it and it's in the geographical areas that we're interested in. So we look at every opportunity that kind of meets our -- that ticks those boxes.
All right. Just one last one, any update with respect to development spending in 2019 and any particular new projects that are set to advance this year?
The only development spending we have is for the expansion on one of our retirement homes, so the spend there is not significant. It's close to $12 million or so, and that will finish -- that project would complete in the first half of this year, operational in the second half. So that really, over 2018, we have bought some land. We might have some -- a little bit of cost here and there, that would just be going through different phases of that zoning process or planning process for those sites, but nothing imminent for a redevelopment project as of yet that we can share.
Okay. So that is really where I was going. So I guess, nothing material on the Long Term Care redevelopment program at this point. But is that more, I guess, of a potential 2020 ramp-up?
Yes. We're continuing to work with the municipalities, as Nitin said, on approved planning approvals, simultaneous to working with the government on the Ministry of Health approvals to move those projects along. So we're still working on them. We just don't expect really to be -- although we would hope to be in the ground in '19, we're -- realistically, probably not.
Your next question comes from the line of Troy MacLean from BMO Capital Markets.
Nitin, I think you just said that the Island Park expansion is going to cost about $12 million. That's a little higher than what I remember that project cost was going to be. Can you describe kind of what drove the higher cost?
I think when we first started, Troy, we always talked about cost being around $10 million to $12 million. We also talked about the development yield being north of 10%. So we're still in that range, towards the higher end of the range. Construction costs continue to rise up across, but our yield has stayed unchanged. We still are confident that the yield that we'll get on that development will be north of 10%.
Are there any other projects like that you think you would start? I mean, this one is nearing completion and it's a pretty high yield. Is there anything else in the portfolio that would be like near term?
There are a few other sites that we are looking at which could be similar to this, but I think it's too early for us to comment on it.
And then I know you mentioned that Durham and Ottawa are oversupplied, but are you seeing any new construction in any of the markets you're in that you think are going to lead to future supply pressure?
Yes, there are a couple. One is White Rock, which may impact our South Surrey residences. There's new supply coming on we anticipate this summer in that market as well as new supply in Barrie and that, again, is late summer, fall. So we'll just keep our eye on that.
And are these new builders to the industry that you'd think would be vendors? Or are they kind of experienced operators?
They are experienced. They are well-known, experienced operators.
And then just finally for me, it's just on the debt refi for 2019, it's about $90 million. Given what you want to do with your maturity schedule, what kind of rate do you think you can refinance that debt at? I know interest rates are moving around, but I'm just curious about how you felt.
I think it's a -- that portfolio is a mix of some Ontario Long Term Care, some BC residential care and some retirement homes. And the reason why the importance to break it down like that is that there's no CMHC program for Ontario Long Term Care but there is a program for retirement homes and for BC residential care. So our recent refi for CMHC has been all-in rates for around 10 years less than 3%. So the debt which would qualify for CMHC, we would look at that. And for Ontario Long Term Care, we will do that refinancing, keeping in mind that we have a debenture coming due in a couple of years as well. So we'll start a bit of planning for that as well. So I think the rates for CMHC are going to be quite favorable, and then for Long Term Care, it's going to be a bit of work starting on our bond refinancing.
Your next question comes from the line of Tal Woolley from National Bank.
I just wanted to start by asking a little bit about your conversations with the government here in Ontario. Is it, in your sense from them, is it kind of -- it's just still increasing the overall number of beds, providing the top up beds, all of those commitments that were sort of made during the election campaign? They're still -- those are -- still seem firm to you?
Oh, yes. I think that's definitely the message. And I think there's -- they're possibly seeking out input from stakeholders, operators specifically, for ways to get some traction.
And the other thing, too, is just -- like in the early sort of press reports we've seen in some of the overhaul they're proposing, the focus does, at least to my eyes, seem to be on, like sort of the administering spend that's within health care, and not necessarily looking at service cuts per se, like in terms of the on the ground support. Like what's your sense having had some conversations with them?
Yes, I would say that seems to be consistent with what we've seen. We haven't seen or heard of cuts to service delivery per se, but a lot of focus on reducing red tape and administrative efficiencies, which is probably a good thing.
Okay. And then just on that whole overhaul of like the [ loans ] and all that stuff that's being proposed that they're -- do you have a sense of the timing of when we might understand fully or when the government sort of might reveal its plans?
We don't. We really don't.
Okay. And then I guess my last question would just be you sort of talked about on the Long Term Care redevelopment that it's -- maybe the timelines are bleeding back a little bit. Can you talk to sort of the tempo of that process having gone through this change in government right now and how you sort of see that playing out? Or do you expect to see it maybe the speed, sort of the decision-making improve over time? Or...
I think so. I think it's just going to take time. They've already done some significant reorganization of the ministry so that -- to streamline the decision-making process. So we do expect that it will be much more efficient once it gets going.
Okay. And then just lastly when you're looking at -- when you sort of have this Long Term Care redevelopment process to work through and you're trying to build the Retirement business at the same time, how are you sort of deciding -- I guess, I just think about that Long Term Care redevelopment as something you have to work through. How do you sort of decide to take on new Retirement projects or other projects within the company when you're sort of facing that? Like, do you have the capacity to be able to handle all of this once it really starts to come through? Or will you need to scale up more?
Oh, yes. We're constantly scaling up, and we added to our team, certainly with the acquisition, and we continue to do that as we -- as there's opportunities, we scale up accordingly.
Your next question comes from the line of Michael Smith from RBC Capital Markets.
Lois, I know there's a lot of moving parts, but I'm just wondering, is the integration more or less done at this point?
It's on track. We have said that this was a big portfolio. If you recall, we acquired the 2 Waterfords late in '17 and right on the heels of that closed on the Ten acquisition property. So it's been a lot of work, and we said that it would take a good year to integrate just because we welcomed over 1,200 employees and thousands of residents. So it is a lot of work and they operate -- it is an operating business, as you know, and so it will take a good year, and that will take us well into April of this year to get everyone on the platform. And even beyond, there's still a lot of work that we would want to do to harmonize everything.
But so far you're happy?
Yes, we're happy. It's a great acquisition. They're great properties, and we are very pleased with the progress. It's on target.
And I wonder if you could just comment on the labor conditions in both BC and Ontario.
Well, it's tough. There is a lot of demand for good employees, and there's a lot of options now in a tight labor market for people to work anywhere. So it is very competitive both in BC and Ontario, particularly competitive in part-time. That's where we see most of the turnover in part-time workers; personal support workers and so on where they might have a better opportunity or they want to keep part-time jobs so they can work at multiple places with shifts that suit them. So that's where we see probably the most turnover. And then as well just recruiting good leaders is always challenging and competitive.
Okay. And you've already commented on some regulatory issues or changes, positive I guess in Ontario. Any comments on BC?
Well, BC, the impact is -- it's more regional because in BC, the regional health authority really has the majority of -- kind of, authority over both Retirement living and Long Term Care. That's who we interface the most with. So that's probably -- each region is a bit different. So I wouldn't say that there's been a major change other than there's -- the unions are pretty active in BC.
Okay. And just finally for clarification, when you say in terms of your outlook for same property NOI growth for LTC, I think you said steady is what you're looking at. So does that mean, like between 1% and 2%? Or does it mean 0?
So for this year, we had around 1.6% growth for the year. But that included a onetime medical services premium. So I think if you remove that, you're closer to 1%. And I think that would be our outlook going forward for 2019.
[Operator Instructions] Your next question comes from the line of Chris Couprie from CIBC.
Sorry. My questions have been answered.
[Operator Instructions] I am showing no further questions at this time. Please continue.
Okay. Well, thank you, Kyle, and thank you, everyone, for joining our call this morning, for your ongoing support 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.