Good morning, ladies and gentlemen, and welcome 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 and thank you for joining us today. There's a slide presentation to accompany this conference call available on our website at chartwelldot com under the Investor Relations tab. Joining me 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 operating teams delivered strong financial results in the Q1 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 3 new and developed retirement residences in Burnaby, BC Edmonton, Alberta and Toronto, Ontario adding 74 suites to our operating property portfolio as you can see on Slide 3.
There are 4 additional openings scheduled for 2019, including 3 projects with our partners, Signature Living and Batimo. Our financial position remains strong as you can see on Slide 4. At March 31, 2019, our liquidity, which includes cash and available borrowing capacity under our credit facilities amounted to $369,000,000 We continued to build the value of our unencumbered asset pool, which has grown to 38 properties valued at $785,000,000 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 $400,000,000 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 financing 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 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 69 suites with 4 projects, that's 402 suites in construction and 5 projects of 767 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 additional suites in Quebec through our partnership with Batimo. And subsequent to the quarter end, we entered into an agreement to sell 1 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 6, 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 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 7 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 7, 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 8, for Q1 2019, FFO was $41,700,000 or $0.22 per unit compared to $42,800,000 or $0.20 per unit in Q1 2018. The following items impacted the change in FFO. Higher adjusted NOI of $8,000,000 consisting of a $3,200,000 increase in same property adjusted NOI and a $4,800,000 increase in contributions from acquisitions and developments. Higher interest income of $200,000 and other items combined of 100,000 dollars were partially offset by higher finance costs of $3,000,000 lower management fee revenue of $800,000 and higher G and A expenses of $200,000 For Q1 2019, FFO was reduced by $1,900,000 of lease up losses and imputed cost of debt related to our development project.
Comparable number for Q1 2018 was $800,000 dollars Turning to our operating platform results as shown on Slide 9, our Ontario Retirement Platform same property adjusted NOI increased $1,900,000 or 5.4 percent 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 twenty nineteen, our Western Canada same property adjusted NOI increased $100,000 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 Q1 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 $1,200,000 or 20.1 percent 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 90 7.7% 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 to 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.
But 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 them to ensure a smooth transition. Thank you for your time and attention this morning. We now be pleased to answer any questions you may have.
We will now move to the first question.
Brent and Vlad on the retirement and promotion.
Thank you.
In terms of question, occupancy, that's the data you give is weighted for the quarter. Is that correct?
Yes.
Okay. How did that trend in during the quarter? And more importantly, how is it trending thus far in
Q2? So 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 up season is end of the year. And then in Q1, there is usually more attrition than move ins. So 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. And maybe I'll pass it over to Karen to talk about the trends now.
Yes. So we're still seeing
occupancy
are the that's certainly the tougher markets.
Okay. So 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?
Yes. Yes. And we were really pleased though to see in Q1 that permanent move ins were up, as I said, by 8% and then the permanent move outs were down by 9%. And 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, but 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. But we certainly prefer the private pay. So it would depend on the market and it would definitely depend on the details of those programs.
Okay. Thanks. I'll turn it back.
And we'll move to the next question.
Hi, it's Brendan Abrams here from Canaccord.
Good morning.
Good 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?
Or do you think pretty much going to be the status quo of what we've seen last few years?
As you mentioned, I've been with the company now for over 15 years and working with brands very closely on all of these points. And 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. So 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. And just turning over to the operations. Clearly there's some competitive pressures in certain markets, but at the same time you're able to grow rental rates across the portfolio. Can you just talk a little bit about kind of that dynamic where there is some pressure on occupancy, but at the same time, you have been able to grow rent?
Yes, sure. The occupancy pressures Karen has 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. And that certainly helps to overcome some of the occupancy declines and continue to grow our revenue and deliver same property NOI growth.
And we're not done yet. We continue down this path and we will get better as the time goes on. And we are though optimistic that the occupancy will improve later this year and going forward.
Great. And 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 kind of that catalyst for that upward move over the next few years? Is it an acceleration in demand based on kind of population projections? Is it kind of a curtailment of future supply maybe due to construction costs, some combination or what takes us from 91% to 95% over the next few years?
Yes, it's Brent. Our strongly held view is that highly engaged employees will deliver a great customer experience and 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. And if all the references in your community are saying this is the best place to be, people will come and you'll get a bigger share of the clientele that is looking for a place to go than your competitors. And so 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. So it's the focus on that. It's the investment in that that we believe will drive occupancy. You layer in the fact that demographics are getting stronger every single year over the next 5 years, quite significantly so. We think that will give us a lift as well.
And on the issue of new supply, it is running at a higher rate than perhaps any of us would like. But 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 supplies. If there's too much new supply, it will slow in certain cases, it will slow pickup of occupancy in those homes. And so it will naturally slow down. We're pretty confident that's the case. And between all three of those items, I think we will hit our target.
Right. And I guess just talking about lease up with respect to the 3 you've completed year to date, anywhere between 20% to 40% occupied currently. What are your expectations in terms of timing of those of to where you get stabilized occupancy?
Yes. We've been consistently running underwriting more conservative lease up periods. So for these properties, it's between 2 3 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 and we expect that we'll catch up and we'll lease these properties as planned.
Okay. And then just last question for me before I turn it over. Just some clarification. On the pre construction pipeline, the 5 projects referenced there, are those projects that will go ahead, I mean, in terms of they've gone they have the green light or are they still subject to market conditions, construction cost projections, etcetera?
They're still subject to construction cost projections and 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. But at the present time, we are actively evaluating all of these projects and assessing their liability and risks associated with them.
Okay. That's helpful. Thank you.
And 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 does like it did this quarter?
Well, we will 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. But generally, there's we will not be cutting on our repairs and maintenance expenses. We'll not be investing in our staff developments and things like that, that we would stop doing because occupancy declines a little bit. So those levers we are available, but we're not really actively using them because we believe that it impacts long term prospects of the property.
Okay. And then at the sumac, 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. I mean, there's less services that people are buying right upfront when they enter these properties. So there's less staff in the beginning because the services are not being required at the beginning. And 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 say, a regular retirement home.
And 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 cost, 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 a la carte basis. But because this model is relatively new in Ontario, it remains to be seen how the market will view those.
Okay. And then just lastly, you rolled out the internal FFO per unit metric, I think in Q4 with the Q4 release, I was 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 into to have us start looking at this? And is there a stretch where you think that those growth rates actually might start to diverge more materially?
So 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 have been capitalized as cost of development. Under IFRS, these costs are required to be expensed as incurred.
And so 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. And so because of that variability, we didn't want and IFFO is based for compensation as a compensation metric for our senior team and actually most people across the company. And so 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 impacts our FFO for wrong reasons. And so the high FFO 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 activities 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.
We'll move to the next in the queue.
Thanks. Good morning. It's Pammi from Scotia.
Good
Good morning. Just curious on the Sumac, is that running ahead or behind in terms of your leasing expectations?
It is slightly behind, Tony.
Okay. And then just can you comment on what range of rents you're achieving there, say, comparable to, I guess, the neighboring residential multifamily type product?
Our rates are approximately $600 to $800 a month more than the comparable apartment buildings rates in Toronto. And 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. And so for that, our rates are higher than regular apartment rates.
And so what is sort of the range of the all in rate?
I think right now, 1 bedroom would be in about $2,800 area and 2 bedrooms will be in $34,000 $3,500 range.
Got it. Maybe just switching gears, looking at the Long Term Care segment, I realize obviously it's 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 an impact timing impact of the Easter, and the rest of it is coming from higher 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.
And so in prior years, we knew exactly what we would get. We budget for it across 12 months and we might overspend at the beginning of the year because you knew you were getting back to the end of the year because you knew what your funding was. And so 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.
So a small piece of it is 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. And so these are privately funded by residents?
Sorry, Fama, 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. Could 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. Then what's your question?
Yes. 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? Yes. Well, our expectation is certainly to continue to grow occupancy. And we have overall target of 95% in 5 years. It's actually applicable across the country.
We expect that this growth is going to be slower in the early years of this 5 year cycle and faster at the back end of it. So going from 85 to 95 is a long way and we're going to start making movement towards that direction, but it is going to be slower in the first few years of our 5 year strategy.
Great. I will turn it back. Thanks very much. Okay.
And actually, at this time, it looks like we have no further questions from the audience. I'll 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.