Please stand by. Good morning, ladies and gentlemen, and welcome to the Chartwell Retirement Residences Q2 2019 financial results conference call. Following the formal comments, we will hold a question and answer session. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Brent Binions, President and Chief Executive Officer of Chartwell Retirement Residences. Please go ahead, sir.
Thank you. Good morning. Thank you for joining us today. There's a slide presentation to accompany this conference call available on our website at chartwell.com under the investor relations tab. Joining me today are Vlad Volodarski, Chief Financial Officer and Chief Investment Officer, and Karen Sullivan, Chief Operating Officer. Let me remind everyone that during this call, we may make statements containing forward-looking information and non-GAAP measures. I direct you to our MD&A and other security filings for information about the assumptions, risks, and uncertainties inherent in such forward-looking information and details of such non-GAAP measures. These documents can be found on our website or at sedar.com. Our results in the second quarter of 2019 have been impacted by the timing of the Good Friday statutory holiday and certain other expenses, as well as lower occupancy due to competitive pressures in some of our markets.
We are well on our way to executing on our five-year strategy with the scheduled rollout of our newly developed customer experience training program to our frontline staff in late 2019 and early 2020. We continue our successful development program in 2019, having opened three newly developed retirement residences to date with lease-ups in progress. In 2019 to date, we have completed sales of two non-core retirement residences and entered into a definitive agreement to sell four non-core long-term care properties in Ontario. The closing of that sale is expected in early 2020, being subject to the receipt of regulatory approvals. Our financial position remains strong as you can see on slide four. June 30, 2019, our liquidity amounted to CAD 327.7 million, which included CAD 14.5 million of cash and cash equivalents and CAD 313.2 million of available borrowing capacity on our credit facilities.
At June 30, 2019, our share of cash and cash equivalents held in our equity accounted JVs was CAD 5.5 million. The interest coverage ratio on a rolling 12-month basis remains strong at 3.2 at June 30, 2019, consistent with December 31, 2018. Our indebtedness percentage calculated using the historical cost of our assets was 50.3% at June 30, 2019, and our debt-to-capitalization ratio was 41.6%. Net debt to adjusted EBITDA ratio increased 8.2 times as newly completed development properties currently in lease-up have not yet achieved their full EBITDA contribution. We continue to build value in our real estate portfolio through portfolio and asset management programs, development of new properties, and opportunistic acquisitions, as shown on slide five. These value-add activities are supported by extensive industry and market research and by rigorous risk management practices.
Work continues on our development pipeline of 1,170 suites with five projects, 524 suites in construction, and four projects, 646 suites in pre-development. These projects are expected to generate meaningful development returns and allow us to grow our property portfolio with new, efficient, state-of-the-art residences. We continue to add future projects to our development pipeline. We have options to acquire close to 2,800 additional suites in Quebec through our partnership with Batimo. I will now turn it over to Karen Sullivan, our Chief Operating Officer, to talk about some operational initiatives she and her team are working on. Karen.
Thanks, Brent. Turning to slide six, we continue to implement a number of sales and marketing strategies that are designed to position our homes to compete effectively with the increasing number of new developments in specific markets. These include cluster sales strategies, where our sales consultants work as a team in communities where we have a number of properties in order to improve sales coverage and help our prospects understand the variety of options available to them in terms of service, rate, and availability. In the busy Ottawa market, we have taken this one step further and introduced a specialist who can help prospects navigate and select from our 13 properties in the Ottawa, Canada area.
We also continue to focus on having our sales personnel in our homes build business-to-business relationships with community influencers such as realtors, financial planners, healthcare professionals, and other community influencers who interact with local seniors. In some of our more competitive markets, we have hired business-to-business specialists to assist all of the local homes in the area with this strategy. Our call center continues to produce positive results, and after significant success in setting up call center agents in our Montreal office, we are now in the process of hiring agents in our Vancouver office who can be experts with respect to our homes in British Columbia and Alberta and provide even better coverage during extended hours. As our busiest leasing season approaches, we are in the final stages of preparing to launch our new brand marketing campaign in September.
This multimedia campaign will be diversified across major channels, including television, digital, radio, newspaper, magazine, and direct mail. Turning to slide seven. In Q2, we celebrated our frontline staff during Employee Appreciation Week, holding special events and honoring those who have met employment milestones. This quarter, we are taking their pulse through our annual employee engagement survey as we strive to get to our 2023 goal of having 55% of our employees very satisfied. We will use the feedback from this survey to continue on our journey to make improvements in our homes across the country. We are also in the process of tabulating the results from our customer satisfaction survey, where our 2023 goal is to have 67% of our residents very satisfied. Just last week, we launched a major initiative to assist us on that journey by starting the Chartwell Experience, a custom-made proprietary training program.
First sessions have been delivered to the head office staff. The training will continue to be rolled out to over 800 managers this fall, and then to our thousands of frontline retirement home employees in late 2019 and early 2020. We are confident that this program will set us apart from our competition, enhance overall employee engagement and resident satisfaction, and ultimately increase referrals. Although occupancy has been a challenge due to increasing supply, we are beginning to see this moderating. With our sales and marketing strategies, along with our continued focus on the experience that we are creating for employees and residents, we expect improvements to occupancy going forward. I will now turn it over to Vlad to discuss our Q2 2019 financial performance.
Thank you, Karen. As shown on slide eight, in Q2 2019, net loss was CAD 1.6 million compared to net income of CAD 7 million Q2 2018. The decrease in net income was primarily due to higher depreciation expenses and negative changes in fair value of financial instruments, partially offset by higher contributions from property operations. Q2 2019 FFO was CAD 47.1 million, or CAD 0.22 per unit, compared to CAD 48.9 million, or CAD 0.23 per unit in Q2 2018, primarily due to higher financing and G&A expenses, partially offset by higher NOI from properties. Our quarter-over-quarter operating results were impacted by the timing of the statutory holiday. We estimate that the impact was approximately CAD 900,000. Q2 2019 FFO was impacted by CAD 2.3 million of lease-up losses and imputed cost of debt related to our development projects. This compares to CAD 2.4 million in Q2 2018.
In Q2 2019, combined same property portfolio occupancy was 89.8%, compared to 90.7% in Q2 2018. For 2019 year to date, same property adjusted NOI increased CAD 2.4 million, or 1.8%, and FFO per unit increased 2.3%. Turning to our operating platform results, as shown on slide nine, our Ontario platform same property NOI increased CAD 0.4 million or 1.1%, as rental rate increases in line with competitive market conditions was partially offset by lower occupancies, higher staffing costs, property tax, food, administrative, and repairs and maintenance expenses. In Q2 2019, same property occupancy was 84.3%, compared to 85.6% in Q2 2018, primarily due to competitive market pressures in some markets. On slide 10, in Q2 2019, our Western Canada same property adjusted NOI decreased CAD 0.8 million, or 5.8%.
In addition to the timing of the statutory holiday, our Western Canada same property results were impacted by higher employment health taxes, which are expected to reverse in 2020, higher staffing expenses at one community where we implemented our signature Memory Living program and where the corresponding revenue increases are expected to be realized on resident turnover, higher utility costs mainly related to a rebate received in 2018 related to prior years, and higher property taxes. In Q2 2019, same property occupancy was 95%, compared to 95.9% in Q2 2018. On slide 11, you will see our Quebec platform same property adjusted NOI increased CAD 0.1 million or 0.7% in Q2 2019, primarily due to rental rate increases in line with competitive market conditions and lower marketing expenses, partially offset by higher staffing costs, administrative, food, and repair and maintenance expenses, and lower occupancies.
In Q2 2019, same property occupancy was 90.9%, compared to 92% in the second quarter of last year. As shown on slide 12, our Ontario long-term care platform same property adjusted NOI decreased 3.8% in Q2 2019, primarily due to timing of certain expenses, including the timing of the statutory holiday. Year to date, the Ontario LTC platform same property adjusted NOI is higher by 6.8%. Weighted average occupancy in the same property portfolio were 98.7%, compared to 98.4% in Q2 2018. I will now turn the call back to Brent to wrap up.
Thanks, Vlad. We believe that by focusing on enhancing our resident experience in our homes and by delivering exceptional services and care to our residents, we will generate strong financial results and long-term sustainable value creation for our unitholders. We recognize that only highly engaged employees will deliver exceptional services and quality care to our residents, and we continue to make significant investments in recruitment, training, and development of our team members. We continue to improve corporate support delivered to our operating teams, including the implementation of new technology solutions to better understand our customers, communicate with our employees, and reduce administrative time commitment in the field.
We have put the infrastructure in place to successfully execute on the significant development program we set for ourselves for 2019 and beyond, as we are confident that these new state-of-the-art properties will meaningfully contribute to enhancing the quality of our real estate portfolio and provide strong value creation for our unitholders over time. We also remain open to and proactively seek additional acquisition and development opportunities in our core markets. Thank you for your time and attention this morning. We'd now be pleased to answer any questions you may have.
Thank you. To the audience, if you do have a question at this time, please press star one on your touch-tone phone. Just a reminder, if you are joining us via speakerphone today, make sure your mute function is turned off to allow the signal to reach our equipment.
Once again, that is star one for questions, and a voice prompt on your phone will indicate when your line is open. If you would please state your name and your company name before posing your question. We'll take the first caller. Please go ahead.
Lorne Kalmar, TD Securities.
Hi, go ahead.
Hello.
Oh, hi. Sorry, guys. Just quickly on the St-Gabriel, the Batimo development. With that now stabilized, are you guys still on track to acquire that during the quarter?
Sorry, I didn't hear the question.
With the St-Gabriel now stabilized, are you guys still on track to complete the acquisition of it during Q3?
It's either going to be in Q3 or Q4. We still need to do our regular due diligence on this property, and as soon as it's completed, we'll be prepared to acquire it.
Any idea of price and expected yield?
No. At this time, we're still negotiating the price.
Okay. Just, I saw, obviously, you guys are getting rid of four LTC Ontario properties. Is there a concerned effort to lower the exposure to the LTC segment, or is that sort of just a one-off?
That's more of a one-off transaction. We were actually not marketing these properties. We were approached out of the blue, and someone wanted these four, and we looked at it and said, "Maybe it makes some sense for us." We proceeded with that transaction, but nothing beyond that.
Okay. Just lastly from me, noticed that capitalized interest was down a little bit sequentially. Was that related to The Sumach commencing operations?
The Sumach, Carlton, and Westcott all commenced operations in the first half of this year. Interest stopped being capitalized for these properties.
Okay. Just what's a good run rate for capitalized interest going forward?
That really depends on the timing of the investments, and it's really hard to model for the future. At this time, the best you could probably do is just continue with the existing run rate. As the investments continue to be made in new projects, they'll probably increase. As the projects open, the capitalization stops. It really is a question of timing and volume of investments, which depends on quarter-over-quarter fluctuates.
Fair enough. All right. I'll turn it back. Thanks.
Caller, please go ahead.
Hi, it's Brendon Abrams from Canaccord.
Morning.
Morning. Just taking a look at same property occupancy, obviously, continued to trend lower during the quarter. I guess specifically in Ontario, I'd just like to get your guys' view on what would you view as kind of a reasonable recovery in the near term? Call it maybe the next 12 months, and what do you think needs to happen in order to get there?
Well, we'll answer this in a couple of parts. Occupancy does remain an ongoing challenge. New developments continue to open and compete for new residents. We expect the occupancy issues will continue through the end of this year. Will ease up into 2020 as the demographic growth catches up with new supply growth because supply growth is moderating. We still expect to have same-store NOI growth through this year, perhaps slightly lower than previously expected, maybe closer to 2% than it was before. We have numerous strategies. Karen spoke to some of them, and maybe Karen can just chat a wee bit about what the fall looks like.
The fall is our traditionally, and we expect it to be our best leasing season. We are optimistic going into the fall. Also optimistic based on the number and quality of our various strategies. In particular, very excited about our new marketing campaign that you'll see in early September. That's a multimedia campaign. It starts in early September. We have an open house, which is the sort of call to action from that, a little later in September. This cluster sales approach in some of the centers where we have a number of homes is starting to yield some results for us for sure. Having the call center agents in Montreal has worked so well that we've decided to do that in Vancouver. We're just getting those folks set up now, and that's working well.
A little bit longer-term strategies around this business-to-business, working with realtors and financial planners and healthcare partners is starting to work for us as well. We're very excited about what we're doing in terms of our customer service training. What that will do for us in terms of what is our biggest source of prospects for the future, and that's referrals. We're still very optimistic about the future in terms of occupancy.
Okay. Yeah, clearly many different initiatives and strategies on that front. I didn't hear price or rental concessions. Is that a strategy you're not considering at the time?
That is indeed a strategy we are not considering. There will be no price concessions.
Okay. Good to know. Just in terms of same property NOI, Vlad, do you know what the number would have been if you would have normalized for the stat holiday?
Yeah. It's about CAD 1 million, as I said, CAD 900 plus thousand is the impact quarter-over-quarter. The growth would've been flat.
Right. Okay. Last question from me, just in terms of Alberta, obviously down about 6%. I assume that reflects the Edmonton portfolio acquired last year. I am just wondering how that portfolio is performing relative to the underwriting.
No, the same property numbers do not include Edmonton portfolio that was acquired last year. To answer your question about Edmonton portfolio, it's performing a little slower than we originally anticipated. There is one property that is in lease-up that has not leased up as fast as we originally expected. We're seeing good traction on that property and fully expect to catch up back to where we originally expected this portfolio to perform.
Okay. Sorry, one last question from me. I'm just taking a look at page 13 in the MD&A, where it talks about the 18 properties acquired or developed after January 1. I just want to make sure I have this correct. NOI for the quarter and the year, basically, a little bit of a loss, and what you're saying is, once these are stabilized at 95% occupancy, they should generate NOI of CAD 10.8 million. Just want to make sure.
Yeah. This is in reference specifically to the three properties that are included as part of these 18. These three properties are new developments that we opened this year or late last year. I'm showing here the contributions that these properties made so far to the overall NOI and our expectation of these properties in terms of the stabilized NOI.
I see. Okay. That is very helpful. Thank you. Turn it over.
Welcome.
We'll move to the next caller. Please go ahead.
Chris Couprie, CIBC.
Good morning.
Good morning, guys. Wanted to touch on the occupancy again. I believe there were comments earlier that there was hope that occupancy is going to improve. Have you started to see any of that kind of relative to quarter end?
Yes. As we move into what we said is our best season, our future metrics are all turning green, so we expect to have a good fall.
Okay. Just touching on development, you mentioned that you're seeing, I say, a slowdown in new developments. If you can comment on why do you think that is? With cap rates looking like they have maybe compressed a little bit, do you think that could be incentive to turn development back on?
The projects that are currently in construction, they're going to be completed and opened. That's Brent's comments about continuing pressures this year will continue. We are seeing delays, and in fact, we're ourselves delaying some projects that we thought would be in construction at the present time because the fast acceleration of construction costs. We hear anecdotally from participants in the market that they're doing the same thing, that people are evaluating their performance based on the construction cost estimates that we're currently seeing. That causes us to believe that the growth in new supply will moderate into the 2020.
Okay. On the LTC assets that are being sold, are these Class A?
No, they're all Class C.
All Class C. Okay, great. Just on that CAD 900,000 Easter impact, is that mostly in the LTC portfolio?
About half and half.
Half and half. Okay, great. Just last one for me is the SEIU negotiations. Have those been concluded?
No. Well, we finished the negotiations. It's gone to arbitration. The case is in. We are waiting for a decision from the arbitrator.
Okay. Thanks, guys.
Caller, please go ahead with your questions.
Thanks. Good morning. It's Pammi Bir from RBC Capital Markets.
Morning.
Morning. Just maybe looking at the Ontario retirement home portfolio again. The quarter-over-quarter drop in occupancy was rather large. I'm just curious, was that a function of, again, a particular market or a change in the composition of that inventory?
No, Pammi, that's more the impact of the development in the various markets that we're in. As we have resident turnover in the normal course, and it's been pretty normal this year. There are more options for people to choose from, many of them brand-new state-of-the-art properties. We're competing across for the same number of residents, maybe slightly increased, because demographics are getting better. The supply is running ahead of it, and so people will generally tour three properties. We had seen, through this period of time, somewhat fewer tours as the options has increased for people. I believe it's normal turnover and slightly less fill rate, based on there are more options for people to choose from.
Not necessarily a function of the chain. What I was referring to actually was the composition of your same-property portfolio, meaning properties that are still in lease-up, but they now form part of the same property bucket.
Oh. There's maybe a little bit of that, but the majority of it is not that. It's not really composition.
That's a small piece of it.
Got it. Okay. Then just along those lines, Brent, to your comments around the competitors, I'm just curious if you have some insight into, you mentioned new state-of-the-art properties, but what are some of the most common cited factors that you hear about in terms of why a resident may have not selected your property to move into? You mentioned that you're not going to compete on price or concessions, so I'm just curious if you know what the main factors are in that decision to move to a competitor or to move into a competitor site.
Yeah. Well, since the chief influencer is generally the daughter, generally the eldest, most geographically near daughter, but it's generally the case. You walk into a brand-new, fancy, state-of-the-art building, and they like it better. Whether the service levels are as good, that's not something you can understand on day one, and that is what we are refocusing on in terms of how we market these things, and it is how our marketing campaign will come out. We're trying to differentiate on the quality of the service as opposed to the beauty of the brand-new home, except of course, where we have the brand-new home, and then we can sell the real estate as well. It is really just that. It is the tendency for what's bright and shiny seems to be better.
Whether it ends up being better or not always remains to be seen, because it's all about service, but it certainly is being picked because it looks better.
That's helpful. Just one last one, and then I apologize if this was maybe asked earlier. Just want to clarify. How has the supply picture changed relative to some of the data that you provided at the end of last year? If I remember correctly, it was roughly maybe 5% of the inventory in terms of supply growth over the next few years. Has that number moved up materially, or is it kind of still in that park?
Again, we'll update it with our year-end filings. We, again, consolidated data is not available every day for us. I can tell you that what we disclosed had all projects that were in construction at that point in time. There are certainly a few more that started construction between then and now. I cannot tell you definitively whether it's more or less because some of the projects that were in construction before are open. It feels like it's about the same, but I cannot be definitive on that.
Okay. Thanks very much.
Just a reminder, if you do have a question, to please press star one at this time. Caller, please go ahead.
Hi there. It's Tal from National. How are you?
Not too bad, Tal. How are things going with you?
Well, middle of earnings season, we're doing okay. My question this morning is just on the new Ontario government's long-term care and transitional care plans. Do you have any sense on when we might get some more concrete information about how they're going to proceed with redevelopment and transitional care?
Right today, I would say this, there's more discussions going on with the government on this topic than there has been for the last 10 years put together. No solutions as of yet. For the first time in quite some time, it is a bit of a focus. I guess all I can tell you is it's being worked on, but there are no answers at the present time.
Okay. My next question, obviously, there was a big transaction announced in Quebec in the last couple of months. If it closes and goes forward, does it change your perspective on the Quebec market or your outlook for that market going forward?
No, the transaction doesn't change our outlook on Quebec market. We will continue with our development program with Batimo, where they're developing, and we're buying properties. We continue to be present in that market. There's nothing, I guess, new from the market perspective other than valuations that this transaction introduced. These homes already operate and compete with us, and they'll continue to operate and compete with us.
Okay. That's great. Thanks very much, gentlemen.
We'll take the next caller. Please go ahead.
Hello.
Good morning. Just on your comment about developers slowing down because of construction cost, was that across the country or specific to Ontario?
We believe that it's the same across the country, at least in the markets that we operate in, maybe to a lesser degree in Quebec, although there's construction cost increases there as well. Certainly, places like BC, Alberta, and Ontario are impacted by this increase in construction costs, by rapid increases in construction costs.
Are you still able to get your typical 3%-5% rent lift on existing tenants, or has the lower occupancy impacted that as well?
It is not impacted. We are still able to do that.
Then, does the change in supply, kind of alter your view about what markets you want to be in? Are there any smaller markets that maybe has seen too much supply where you'd look to exit?
The answer to that is yes, but not necessarily the supply-driven. It is strategy-driven. We've, according to our strategy, do not want to operate in the smaller markets. We do not operate smaller homes that cannot be profitable and efficiently operated. We are looking at all these markets through that lens. The competitive situation, if it's in the larger market, is temporary from our perspective, and we're prepared to compete because we think over the long term, these properties will be successful, and that may not be the case for smaller markets. That's why our strategy is not focused on those.
Outside of that big investment by Ventas in Quebec, are you seeing more U.S. buyers looking at Canadian assets, or is it about the same as it was earlier in the year?
It feels like it's the same as it was earlier in the year. We have Ventas, Welltower, and Sabra who are invested in the Canadian marketplace. We pretty much see the same people when we look at the transactions.
Okay. Thank you. That's it for me.
Okay.
We have no additional questions at this time. We'll turn the program back over to our speakers for any additional remarks.
Thank you. That wraps up today's conference call. Thanks again to everybody for joining us. As always, if you have any further questions, please do not hesitate to give us a call. Thank you and goodbye.
Ladies and gentlemen, once again, that does conclude today's conference. Again, thank you all for joining us today.