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 and 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 atsedar.com. Our results in the Q2 of 2019 have been impacted by 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 5 year strategy with the scheduled rollout of our newly developed customer experience training program to our frontline staff in late 2019 early 2020.
We continue our successful development program in 2019, having opened 3 newly developed retirement residences to date with lease ups in progress. In 2019 to date, we have completed sales of 2 non core retirement residences and entered into a definitive agreement to sell 4 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 4, June 30, 2019, our liquidity amounted to $327,700,000 which included $14,500,000 of cash and cash equivalents and $313,200,000 of available borrowing capacity on our credit facilities.
In addition, at June 30, 2019, our share of cash and cash equivalents held in our equity accounted JVs was 5.5 $1,000,000 The interest coverage ratio on a rolling 12 month basis remained strong at 3.2 at June 30, 2019 consistent with December 31, 2018. Our indebtedness percentage calculated using 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 8.2x 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 5. 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 11 70 suites with 5 projects, 5 24 suites in construction and 4 projects, 6 46 suites in predevelopment. 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. In addition, we have options to acquire close to 2,800 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 6. 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 and 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. 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, Kanata area.
We also continue to focus on having our sales personnel in our home build business to business relationships with community influencers such as realtors, financial planners, healthcare professionals and other community influencers who interact with local seniors. And 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 could be experts with respect to our homes in British Columbia and Alberta and provide even better coverage during extended hours. And 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 7, 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 for our 2023 goal is to have 60 percent 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.
1st 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 early 2020. We are confident that this program will set us apart from our competition, enhance overall employee engagement resident satisfaction and ultimately increase referrals. So although occupancy has been a challenge due to increasing supply, we are beginning to see this moderating and 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 twenty
nineteen, net loss was $1,600,000 compared to net income of 7,000,000 dollars 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 47,100,000 dollars or 0.2 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 $900,000 Q2 2019 FFO was impacted by $2,300,000 of lease up losses and imputed cost of debt related to our development projects.
This compares to $2,400,000 in Q2 twenty 18. In Q2 2019 combined same property portfolio occupancy was 89.8% compared to 90.7 percent in Q2 2018. For 2019 year to date, same property adjusted NOI increased 2,400,000 percent and FFO per unit increased 2.3%. Turning to our operating platform results. As shown on Slide 9, our Ontario platform same property NOI increased $400,000 or 1.1 percent 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 $800,000 or 5.8 percent. 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 1 community where we implemented our signature member 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 $100,000 or 0.7 percent 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 Q2 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
Thank
Just quickly on the St. Gabriel to 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 it during 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 No.
At this time, we're still negotiating the price. Okay.
No. At this time, we're still negotiating the price.
Okay. And then just I saw, obviously, you guys are getting rid of 4 LTC Ontario properties. Is there a concern 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 4 and we looked at it and said maybe it makes some sense for us. And so we proceeded with that transaction, but nothing beyond that.
Okay. And then just lastly for me, noticed that capitalized interest was down a little bit sequentially. Was that related to the Sumac commencing operations?
Sumac, Carlton and Westcott all commenced operations in the first half of this year. So interest stopped being capitalized for these properties.
Okay. And then just what's a good run rate for capitalized interest going forward?
It really depends on the timing of the investments, and it's really hard to model for the future. So at this time, the best you could probably do is just continue with existing run rate. But as the investments continue to be made in new projects, they'll probably increase. And then as the projects open, the capitalization stops. So 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.
And caller, please go ahead.
Hi, it's Brendan Abrams from Canaccord.
Good morning.
Good 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? So 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. I mean, 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 and 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.
But we are have numerous strategies, Karen spoke to some of them and maybe Karen can just chat a wee bit about what the fall looks like.
Yes. So the fall is our traditionally and we expect it to be our best leasing season. And so we are optimistic going into the fall and also optimistic based on the number and quality of our various strategies. So 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 marketing or sorry, 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. So 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. And then we're very excited about what we're doing with in terms of our customer service training and what that will do for us in terms of what is our biggest source of prospects for the future and that's referrals. So we're still very optimistic about the future in terms of occupancy.
Okay. So yes, clearly many different initiatives and strategies on that front. I didn't hear price or rental concession. Is that a strategy you're not considering at the time or?
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, Vad, do you know what the number would have been if you would have normalized for the SAT holiday?
Yes, it's about $1,000,000 as I said, dollars 900 plus 1,000 is the impact quarter over quarter. So the growth would have been flat.
Right. Okay.
And last question for me, just in terms of Alberta, obviously down about 6%. I assume that reflects the Edmonton portfolio acquired last I'm 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 the 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. And sorry, one last question for me. I'm just taking a look at Page 13 in the MD and 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 $10,800,000 Is that just wanted to Yes.
So this is in reference specifically to the 3 properties that are included as part of these 18. These three properties are new developments that we opened this year or late last year. And I'm showing here the contribution 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's very helpful. Thank you. I'll turn it over.
You're welcome.
And 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 metrics are our future metrics are all turning green. So we expect to have a good fall.
Okay. And then just touching on development, you mentioned that you're seeing a slowdown in new developments. Just if you can comment on why do you think that is? And with cap rates looking like they have maybe compressed a little bit, you think that could be incentive to turn development back on?
So we are certainly the projects that are currently in construction, they're going to be completed and open. So that's the 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 will be in construction at the present time because the fast acceleration of construction costs. And so we hear anecdotally from participants in the market that they are doing the same thing, that people are reevaluating their performance based on the construction cost estimates that we're currently seeing. So 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. And then just on that $900,000 Easter impact, is that mostly in the LTC portfolio?
About half and half.
Half and half. Okay, great. And then just last one for me is the SEIU negotiations. Have those been concluded?
No. While 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.
And caller, please go ahead with your questions.
Thanks. Good morning. It's Pammi Bir from RBC Capital Markets. Good morning. Good 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, that's on me. 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. And so we're competing across for the same number of residents, maybe slightly increased because demographics are getting better, but the supply is running ahead of it. And so people will generally tour 3 properties and we're seeing somewhat fewer we had seen through this period of time, somewhat fewer tours as the options has increased for people.
So I believe it's normal turnover and slightly less fill rate based on the more options for people to choose from.
Not necessarily a function of the change. 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?
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. And 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 factors what the main factors are in that position to move to a competitor or to move into a competitor site?
Yes. Well, since the chief influencer is generally the daughter, the eldest generally the eldest most geographically near daughter, but it's generally the case. You walk into a brand new state of the art building and they like it better. And whether the service levels are as good, that's not something you can understand on day 1. 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. So we're trying to differentiate on 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. So 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 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 work?
Again, we'll update it with our year end filings. And so we again consolidated that 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 those projects now some of the projects that were in construction before open.
So it feels like it's about the same, but I cannot be definitive on that.
Okay. Thanks very much.
And 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 earning season, we're doing okay. So 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, there's lots 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. So, but no solutions as of yet. But for the first time in quite some time, it is a bit of a focus. So I guess all I can tell you is it's being worked on, but there are no answers at the present time.
Okay. And then 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 markets. We will continue with our development program with Fatimo where they're developing and we're buying properties. And 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.
And we'll take the next caller. Please go ahead. Hello? Hi, go ahead.
Hello. Good morning. Just on the 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 is construction cost increases there as well. But certainly, places like BC, Alberta and Ontario are impacted by this increase in construction costs by rapid increases in construction cost.
And then are you still able to get your typical 3% to 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.
And then does the change in supply kind of alter your view about what markets you want to be in? Are there any like smaller markets that maybe has seen too much supply where you'd look to exit?
The answer to that is yes, but not necessarily 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. And so 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.
And then outside of that big investment by Ventas in Quebec, are you seeing more U. S. Buyers looking at Canadian assets or is it 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. There are some private equity firms that have certain investments and we pretty much see the same people when we look at the transactions.
Okay. Thank you. That's it for me. Okay.
And we have no additional questions at this time. I'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.
And ladies and gentlemen, once again, that does conclude today's conference. And again, thank you all for joining us today.