Please stand by. Good morning, ladies and gentlemen, welcome to today's Chartwell Retirement Residences Q1 2019 financial results call. Following the formal comments, we will hold a question and answer session. Please be advised that this call is being recorded. I'd 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 are Vlad Volodarski, Chief Financial Officer and Chief Investment Officer, 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 operating teams delivered strong financial results in the first quarter of 2019. Despite headwinds from the competitive pressures in some of our markets, our same property portfolio adjusted NOI grew by 4.7%, with FFO per unit growing by 10%.
To date, in 2019, we've opened three new developed retirement residences in Burnaby, BC, Edmonton, Alberta, and Toronto, Ontario, adding 574 suites to our operating property portfolio, as you can see on slide three. There are four additional openings scheduled for 2019, including three projects with our partners, Signature Living and Batimo. Our financial position remains strong, as you can see on slide four. At March 31, 2019, our liquidity, which includes cash and available borrowing capacity under our credit facilities, amounted to CAD 369 million. We continued to build the value of our unencumbered asset pool, which has grown to 38 properties valued at CAD 785 million. Our debt leverage and coverage ratios also remain strong, with interest coverage ratio at 3.3 and net debt to adjusted EBITDA ratio of 8.0.
Importantly, in May, we received approval from our syndicate lenders to extend maturities of our CAD 400 million credit facilities to May 29, 2024, improving the stability of our financing structures and allowing for an even better staggered maturity profile of our debt portfolio. We continue to access low-cost CMHC financing on favorable terms and expect to complete a number of new and top-up mortgage financings this year. 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 1,169 suites, with four projects, that's 402 suites, in construction, five projects, so 767 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. In addition, we have options to acquire close to 2,800 additional suites in Quebec through our partnership with Batimo. Subsequent to the quarter end, we entered into an agreement to sell one non-core property in Ontario. I'd now like to turn it over to Karen Sullivan, our Chief Operating Officer, to talk about some operational initiatives that she and her team are working on. Karen?
Thanks, Brent. Turning to slide six, same-store permanent move-ins were up quarter-over-quarter by 8% in Q1, and move-outs were down by 9%. The move-out trend was in part due to a better outbreak season. We believe that providing enhanced education and awareness, as well as the vaccine being a better match, resulted in a significant reduction in outbreaks. Not only were there less outbreaks, but more importantly, the duration of outbreaks was much shorter, and there was also a decline in residents affected with symptoms, as well as hospitalizations. We also had a 9.2% increase in employee immunization rates. Our spring open house was held on April 7th and was very successful, with a 15% increase in visitors compared to the open house held in the fall of 2018. We also saw a 10% increase in prospects attending.
On the Monday following the open house, our retirement living consultants followed up with these prospects during a national sales blitz. Turning to slide seven. As part of our sales strategy, we are also focused on having our retirement living consultants develop business-to-business relationships with community influencers such as realtors, financial planners, and other community influencers who interact with local seniors. Although in some cases this is a longer-term strategy, we're confident that over time, it will lead to additional initial contacts and eventually permanent move-ins. We're beginning to make strides with some of our recruitment strategies, including increasing awareness of job placement opportunities for candidates with a variety of profiles, including students, recent graduates, and new Canadians. Job fairs were held in various residences and communities across the country in Q1, resulting in candidate hires and increased awareness of job opportunities in these markets.
We are also piloting a Hire for Fit-Train for Skill program to educate PSWs in select Quebec City homes where recruitment challenges are most difficult. I will now turn it over to Vlad to discuss our Q1 2019 financial performance.
Thanks, Karen.
As shown on slide eight for Q1 2019, FFO was CAD 41.7 million or CAD 0.22 per unit, compared to CAD 42.8 million or CAD 0.20 per unit in Q1 2018. The following items impacted the change in FFO. Higher adjusted NOI of CAD 8 million, consisting of a CAD 3.2 million increase in same-property adjusted NOI and a CAD 4.8 million increase in contributions from acquisitions and developments. Higher interest income of CAD 0.2 million and other items combined of CAD 0.1 million, were partially offset by higher finance costs of CAD 3 million, lower management fee revenue of CAD 0.8 million, and higher G&A expenses of CAD 0.2 million. For Q1 2019, FFO was reduced by CAD 1.9 million of lease-up losses and imputed cost of debt related to our development project. Comparable number for Q1 2018 was CAD 0.8 million.
Turning to our operating platform results as shown on slide nine, our Ontario retirement platform, same property adjusted NOI increased CAD 1.9 million or 5.4%, as rental rate increases in line with competitive market conditions, higher ancillary revenues, and lower marketing expenses were partially offset by lower occupancies and higher communication repairs and maintenance costs. In Q1 2019, combined same-property occupancy was 85.9%, compared to 87.6% in Q1 2018. In Q1 2019, our Western Canada same property adjusted NOI increased CAD 0.1 million or 1%, primarily due to rental rate increases in line with competitive market conditions, partially offset by lower occupancies and higher staffing costs, as shown on slide 12. Q1 2019 occupancy was 95.3%, compared to 96.3% in the first quarter of 2018.
On slide 11, you'll see our Quebec platform same property adjusted NOI decreased marginally, primarily due to lower occupancies and higher staffing costs, partially offset by rental rate increases in line with competitive market conditions. Combined same-property occupancy was 91.5%, compared to Q1 2018 occupancy of 92.3%. On slide 12, you'll see our Canadian long-term care platform, same property adjusted NOI increased CAD 1.2 million or 20.1% in Q1 2019, primarily due to higher preferred accommodation, ancillary revenues, and timing of certain expenses. Weighted average occupancies in the same property portfolio were 98.3% in Q1 2019 compared to 97.7% in Q1 2018. I will now turn the call back to Brent to wrap up.
Thanks, Vlad. I'm confident that Chartwell is on the right path. With our unique Chartwell culture, winning business strategy, and strong corporate governance, we are poised to take advantage of the upcoming growth and demand for retirement living in Canada. We have begun our journey towards our 2023 goals with a number of specific initiatives in the areas of customer experience and employee engagement, which undoubtedly will help us to continue improve our scores in these two critical areas. You may have also seen the announcement yesterday that I will be retiring as President and CEO of Chartwell in March of 2020. Until then, I will remain in control. My congratulations to Vlad, who will be the new CEO when I leave. I'm confident that the board has made the right choice, and I will be working closely with him to ensure a smooth transition.
Thank you for your time and attention this morning. We'll now be pleased to answer any questions you may have.
Ladies and gentlemen, if you would like to ask a question, please join the queue by pressing star one on your telephone keypad. If you'd just make sure your mute function is turned off to allow us to receive that signal. Once again, star one for any questions, and if you would just kindly introduce yourself by your name and company before posing it. We will now move to the first question.
Thanks. Jonathan Kelcher with TD Securities. First congrats, Brent and Vlad, on the retirement and promotion.
Thank you.
In terms of question, the occupancy, the data you give is weighted for the quarter. Is that correct?
Yes.
Okay. How did that trend during the quarter, and more importantly, how is it trending thus far in Q2?
In the quarter, it's trending down. That's consistent with the trends that we're seeing every year, where our sort of fastest lease of season is end of the year, and then in Q1, there is usually more attrition than move-ins. This year has not been different than other years other than it's been better in terms of volume. The decreases were lower this year than they were before. Maybe I'll pass it over to Karen to talk about the trends now.
Yeah. We're still seeing occupancy issues in sort of the three areas that are tough across the country. Ottawa, Durham, and Calgary are certainly the tougher markets.
Okay, it sounds like the decline in year-over-year occupancy is probably more due to supply than it is due to, I guess, a tougher outbreak or flu season.
Yeah. We were really pleased, though, to see in Q1 the permanent move-ins were up, as I said, by 8%, the permanent move-outs were down by 9%. As I said, much better outbreak season.
Okay. Do you guys do a lot or much in the way of short-term stays?
In Ontario, we do. Not so much in Quebec and Western Canada, in Ontario, yes.
Is that something you can see increasing with any new programs that the Ontario government might bring out?
We will participate in the consultations that they're starting to have to determine whether there's any value in that. We certainly prefer the private pay. It would depend on the market, and it would definitely depend on the details of those programs.
Okay, thanks. I'll turn it back.
We'll move to the next question.
Hi, it's Brendon Abrams here from Canaccord.
Morning.
Morning. First of all, congrats both Brent on your retirement and Vlad on the appointment. I guess just on that topic, Vlad, obviously, you've been at Chartwell for a long time, and obviously worked closely with Brent for many of those years. I guess, a few questions. Do you expect any major philosophical differences, I suppose, in terms of operations or capital allocation with the business? Do you think pretty much going to be the status quo of what we've seen the last few years?
As you mentioned, I've been with the company now for over 15 years and working with Brent very closely on all of these points. One thing that I can say definitively at this point is I'm 100% confident that the company is on the right path, and all the progress that was made under Brent's leadership is right, and we're moving in the right direction. I do not expect that there'll be any significant changes in direction or capital allocation decisions, or where we're focusing our efforts and our investments.
Okay. Makes sense. Just turning over to the operations. Clearly, there is some competitive pressures in certain markets. At the same time, you are able to grow rental rates across the portfolio. Can you just talk a little bit about that dynamic where there is some pressure on occupancy, at the same time, you have been able to grow rent?
Yeah, sure. The occupancy pressures, Karen, as described pretty clearly for you. In terms of the rental rates, we continue to add new services to our residents. We continue to get better in how we price units based on desirability of those units in the buildings. That certainly helps to overcome some of the occupancy declines and continue to grow our revenue and deliver same property NOI growth. We're not done yet. We continue down this path, and we will get better as the time goes on. We are though optimistic that the occupancy will improve later this year and going forward.
Right. I guess that leads to my next question in terms of last quarter with the announcement of the 2023 objective to be at 95% stabilized occupancy. You're just under 91% today. What do you see really changing or triggering that catalyst for that upward move over the next few years? Is it an acceleration in demand based on population projections? Is it a curtailment of future supply maybe due to construction costs, some combination, or what takes us from 91%-95% over the next few years?
Yeah. It's Brent. Our strongly held view is that highly engaged employees will deliver a great customer experience, that if our customers are getting a great experience, they will talk about that. 70% of everybody who moves in our home has a reference from somebody to move there. If all the references in your community are saying, "This is the best place to be," people will come, you'll get a bigger share of the clientele that is looking for a place to go than your competitors. Our investments in this company are focused on what will drive employee engagement and what will drive customer satisfaction. We're only interested in very engaged employees and highly satisfied customers, residents in our home. It's the focus on that, it's the investment in that we believe will drive occupancy.
You layer in the fact that demographics are getting stronger every single year over the next five years, quite significantly so. We think that will give us a lift as well. On the issue of new supply, it is running at a higher rate than perhaps any of us would like right now, the world is cyclical. I think you'll see that ease off a little bit. Construction costs have already started to slow it down. I think you'll see more slowing down. As people open up homes and don't lease them up very fast, that's what will also put the brakes on new supply. If there's too much new supply, in certain cases, it'll slow pickup of occupancy in those homes. So it will naturally slow down.
We're pretty confident that's the case, between all three of those items, I think we will hit our target.
Right. I guess just talking about lease-up with respect to the three you've completed year to date, anywhere between 20%-40% occupied currently. What are your expectations in terms of timing of those to where you get stabilized occupancy?
Yeah. We've been consistently, Brendon, underwriting more conservative lease-up periods. For these properties, it's between two and three years, what we have, depending on which property it is. They're a little behind of where we expected them to be at the present time, we see very strong traffic and interest in these properties. Certainly, our sales and marketing efforts are paying off, we expect that we'll catch up, and we'll lease these properties as planned.
Okay. Then just last question from me before I turn it over. Just some clarification. On the pre-construction pipeline, the five projects referenced there, are those projects that will go ahead, in terms of they have the green light, or are they still subject to market conditions, construction costs, projections, et cetera?
They're still subject to construction cost projections. They continue to be evaluated on that basis. I expect that some of them will proceed this year, and some of them may be delayed. At the present time, we're actively evaluating all of these projects and assessing their viability and risks associated with them.
Okay. That's helpful. Thank you.
We'll take our next question. Please go ahead.
Hi, good morning. It's Tal Woolley from National Bank. How are you?
Good.
Good. I just wanted to talk quickly about the occupancy versus same property NOI that we saw this quarter. What are sort of the operational or cost levers that you can pull when you do to sort of protect your NOI when the occupancy slides like it did this quarter?
Well, we would not do anything that would impact services that we deliver to our residents or impact long-term performance of the property. What we do from time to time is we adjust staffing levels, depending on the volume of the residents that we're serving in the properties. Generally, we will not be cutting on our repairs and maintenance expenses. We will not be investing in our staff developments and things like that we would stop doing because occupancy declines a little bit. Those levers are available, but we're not really actively using them because we believe that it impacts long-term prospects of the property.
Okay. At The Sumach, given that it's a new-to-market product, is there anything we should be thinking about just in terms of the variability or seasonality of this business versus a traditional retirement facility?
Yes. There's less services that people are buying right up front when they enter these properties, so there's less staff in the beginning because the services are not being required at the beginning. Then as people continue to buy services, there's going to be more staff and more investments in that area. Other than that, I cannot think of anything that would be different in terms of the seasonality or performance of this property from the regular retirement home.
Do you have an estimate of what you think the stabilized cap rate for that building would look like going forward?
Well, our expectation is that the cap rate on construction cost is going to be 7.2% once the building stabilizes. The market cap rate for this building, it's really the question to the appraisal. My view is it's supposed to be a lot lower than it is on the regular retirement home because it's truly an apartment building with services being offered on an à la carte basis. Because this model is relatively new in Ontario, it remains to be seen how the market will view those.
Okay. Then just lastly, you rolled out the internal FFO per unit metric, I think in Q4 with the Q4 release. Just sort of noting, between Q4 and Q1, not much of a divergence in the sort of growth rate between the internal FFO and your regular FFO number. Can you just talk a bit about why you wanted to put this out to have us start looking at this? Is there a stretch where you think that those growth rates actually might start to diverge more materially?
FFO is impacted because of the active development pipeline that we have. FFO is impacted by lease-up losses and imputed cost of debt. Once the project opens, and even sometimes before it opens, we incur marketing costs and other operating costs to open the building. Under the prior Canadian GAAP, those costs would've been capitalized as cost of development. Under IFRS, these costs are required to be expensed as incurred. FFO has the impact of these costs that vary from time to time, given the volume of the development activities and timing of when we open these sales centers.
IFFO is based for compensation as a compensation metric for our senior team, and actually most people across the company. We did not want to create, or the board didn't want to create an incentive for us to purposely delay development projects so we don't incur these lease-up losses and imputed cost of capital that impact our FFO for the wrong reasons. The IFFO metric excludes, this is probably the main difference between FFO and IFFO, is the exclusion of these lease-up losses that vary from the volume of our development activity, so that we're on incentives to continue to develop and make long-term decisions for the company, as opposed to being more driven to the short-term decisions.
Okay. That's great. Thank you very much.
Again, folks, star one for any questions. We'll move to the next in the queue.
Thanks. Good morning. It is Pammi from Scotiabank.
Morning.
Good morning. Just curious on the Sumach, is that running ahead or behind, in terms of your leasing expectations?
It is slightly behind, Pammi.
Okay. Just can you comment on what range of rents you are achieving there, say comparable to, I guess, the neighboring residential multifamily type product?
Our rates are approximately CAD 600-CAD 800 a month more than the comparable apartment buildings rates in Toronto. That is because we have a lot more infrastructure for the residents to use common areas. They have security systems, and we have more staff at our home to address their needs even before they start buying additional services from us. So for that, our rates are higher than the regular apartment rates.
Sorry, what is sort of the range of the all-in rate?
I think right now one bedroom would be in about CAD 2,800 area, and two bedrooms will be in CAD 3,400-CAD 3,500 range.
Got it. Maybe just switching gears, looking at the long-term care segment, I realize obviously it is a smaller piece of the business, but can you maybe just expand on what drove that sizable jump? Was that Good Friday related, or you do mention some ancillary revenues as well?
There is certainly a timing impact of the Easter. The rest of it is coming from higher ancillary revenues and some timing of other smaller expenses.
There's a third piece on that, Pammi. This year, the government's announcement is late. We actually don't have it yet. Usually, we get it back in January, on how funding works. In prior years, we knew exactly what we would get. We'd budget for it across 12 months, and we might overspend at the beginning of the year because you knew you were getting back at the end of the year because you knew what your funding was. In prior years, we might have had a little bit of overspending in Q1, which we don't have this year because we don't know what our funding is, so we have to be more cautious, so we don't have any overspending in Q1. A small piece of it's that as well.
Got it. That's helpful. Maybe just on the ancillary revenues, what exactly do these relate to?
That's additional services that are being provided by ourselves or our partners to the residents in the homes that are allowed under the legislation.
Okay. These are privately funded by residents?
Sorry, Pammi, I didn't get that.
Sorry, these would be paid directly by residents, the ancillary revenues?
Not all of them. Some of them.
Okay. Maybe just in Ontario, is it fair to think of the stabilized occupancy there, is that going to be closer to maybe the mid to high 80% range, rather than, say, low 90% or getting to low 90% over the next couple of years?
Sorry, we didn't get it again, Pammi. You're breaking up.
You broke up. You're a bit garbled. Can you just ask the question again, Pammi?
Sure. Is that a little better?
No, it's worse.
Okay. Let me try. Is that better?
Slightly. Okay, let's try again. What's your question?
Yeah, just in Ontario, looking at some of the new supply pressures, is it fair to think of a stabilized occupancy, is that maybe closer to the mid to high 80% range, instead of maybe, we call it low 90% over the next couple of years?
Yeah. Our expectation is certainly to continue to grow occupancy and we have overall target of 95% in five years. It is actually applicable across the country. We expect that this growth is going to be slower in the early years of this five-year cycle and faster at the back end of it. Going from 85 to 95 is a long way, and we are going to start making movement toward that direction, but it is going to be slower in the first few years of our five-year strategy.
Great. I will turn it back. Thanks very much.
Okay.
Actually, at this time, it looks like we have no further questions from the audience. I will turn the floor back to Mr. Binions for any additional remarks.
Okay. 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.
Once again, ladies and gentlemen, that concludes our call for today. Thanks for joining us. You may now disconnect.