To all participants, thank you for standing by. The conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the Chartwell Retirement Residences Q3 2018 financial results conference call. Following the formal comments, we will hold a question and answer session. Also, please be advised, this conference call is being recorded. I'll 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 chartwell.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&A and other securities 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. Guided by our vision of making people's lives better and our mission, values, and beliefs, our key focus remains on delivering exceptional services and quality care to our residents.
We are confident that our investments in employee engagement and resident experience initiatives, combined with our innovative marketing and sales strategies, will continue to set us apart from competition and produce sustainable value to our unit holders. In 2018, we continued to make good progress in our five priority areas, as shown on slide four. Our operating teams, with the support of our corporate office departments, delivered solid operating results in Q3 2018. Same-property adjusted net operating income increased CAD 1.1 million or 1.6% in Q3 2018, and CAD 7.4 million or 3.7% in 2018 year to date. At September 30, our liquidity position, which include cash and cash equivalents and available borrowing capacity under our credit facilities, amounted to CAD 372.9 million. In addition, our share of cash and equity accounted joint ventures was CAD 8.5 million.
As shown on slide five, interest coverage ratio remained strong at 3.2% in Q3 2018, and net debt to EBITDA ratio was 7.8% at September 30, 2018. It's important to point out that Chartwell is well prepared for continued success in the current rising interest rate environment. Our debt maturity profile is well staggered, with most of the next 10 years' maturities not exceeding our target of 10% of our total debt. The weighted average term to maturity of our mortgage portfolio is over seven years. Our exposure to variable rate debt is small, and we continue to fix rates on these variable rate mortgages through interest rate swaps. We build value in our real estate portfolio through asset management programs, development of new properties, and opportunistic acquisitions, as shown on slide six.
These value-add activities are supported by extensive industry and market research and by rigorous risk management practices. So far in 2018, we've acquired five properties for CAD 317.4 million, substantially increasing our weighting in Western Canada, and we sold our interest in four non-core properties in Quebec. This year, we've opened two newly built residences in Quebec and one in Ontario. The opening of Chartwell Carlton Retirement Residence in Burnaby, B.C., is scheduled for December. All these residents have met or exceeded our pre-leasing targets. Work continues on our development pipeline of 1,742 suites, with six projects in construction and six projects in pre-development. Options to acquire interest in development projects by Batimo in Quebec are expected to add another 2,784 suites to our portfolio over time.
I would 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 seven. During Q3, we received the results of our 2018 mystery shops, which targeted 121 properties, including 59 Chartwell homes and 62 competitors. For the first time, we added prospect interactions with our contact center in order to assess the entire customer journey. On average, Chartwell outperformed its competition in all categories with an overall score of 71%, which was 15% higher than competitors. We also recently received the results of an Ipsos brand awareness survey that demonstrated that Chartwell leads in English Canada compared to all its competitors in both unaided and aided awareness. We also made significant gains in Quebec in both categories of awareness compared to 2017. We view these positive mystery shop and awareness results as validating the effectiveness of both our sales process and our marketing strategies. Turning to slide eight.
We also received the results of our employee engagement and resident satisfaction surveys, and I'm pleased to report we had the highest year-over-year increases in both measures. As I've indicated previously, we focus on very satisfied and very engaged or top box scores, and we moved the dial 9.5% for resident satisfaction and 12% for employee engagement between 2017 and 2018. We continue to believe that the introduction of our Welcome to Chartwell program and our focus on leadership training for our management teams are the reasons for this significant increase. Also in Q3, our homes across the country began to prepare well in advance for the 2018-2019 outbreak season through a targeted campaign called Infection Control: It' s business.
The campaign focuses on awareness, education through targeted presentations, conference calls, and strategic communication to residents and families, as well as immunization clinics. Finally, we recently began welcoming residents at Chartwell Teasdale, phase II in Terrebonne, Quebec, and we are preparing for the opening of Chartwell Carlton in Burnaby, B.C. before the end of the year. We are also preparing to have a busy Q1 with the opening of The Sumach by Chartwell in downtown Toronto and Chartwell Wescott in Edmonton. I will now turn it over to Vlad to discuss our Q3 2018 financial performance.
Thanks, Karen. As shown on slide 10, in Q3 2018, net income from continuing operations and total comprehensive income was CAD 9.1 million, compared to CAD 10.2 million in Q3 2017, primarily due to higher direct property operating general administrative depreciation and finance costs, partially offset by higher resident revenues and lower transaction costs. For Q3 2018, FFO was CAD 53.3 million, or CAD 0.25 per unit diluted, compared to CAD 50.5 million or CAD 0.26 per unit diluted in Q3 2017. The following items contributed to the change in FFO. Higher adjusted net operating income of CAD 5 million, consisting of CAD 1.1 million, or 1.6% increase in same-property adjusted NOI, and a CAD 3.9 million increase in contribution from acquisitions and developments.
Higher management fee revenue of CAD 0.6 million and other items combined of CAD 0.3 million, partially offset by higher G&A expenses of CAD 1.7 million and higher finance costs of CAD 1.4 million.
Same property occupancy was 91.5% in Q3 2018, compared to 92.5% in Q3 2017. Turning to our operating platform results, as shown on slide 11, in Q3 2018, our Ontario platform same property adjusted NOI increased CAD 0.2 million or 0.7%, as rental rate increases in line with competitive market conditions and higher ancillary revenues were partially offset by lower occupancies and higher staffing costs, communication, marketing, and repairs and maintenance expenses. In Q3 2018, same property occupancy was 86.5%, compared to 88.3% in Q3 2017. In Q3 2018, our Western Canada same property adjusted NOI increased CAD 0.1 million or 0.8%, primarily due to rental rate increases in line with competitive market conditions and higher ancillary revenues, partially offset by lower occupancies and higher staffing costs as shown on slide 12. Occupancy in Q3 2018 was 96.2%, compared to 96.9% in Q3 2017.
On slide 13, you will see our Quebec platform same property adjusted NOI increased CAD 0.4 million or 2.5% in Q3 2018, primarily due to rental rate increases, partially offset by lower occupancies and higher staffing costs. In Q3 2018, same property occupancy was 92.4%, compared to 92.9% in Q3 2017. As shown on slide 14, our Canadian long-term care platform same property adjusted NOI increased CAD 0.4 million or 5.1% in Q3 2018, primarily due to higher preferred accommodation revenues, partially offset by timing of certain expenses. Weighted average occupancy in the same property portfolio was 98.3% in Q3 2018, compared to 98.7% in Q3 2017. I will now turn the call back to Brent to wrap up.
Thanks, Vlad. We know we are on the right path. Only highly engaged employees go above and beyond every day to deliver exceptional services and quality care to our residents, creating memorable, personalized experience and wow moments. Very satisfied residents are four times more likely to recommend their residence to their friends and become true ambassadors for Chartwell. We know we have more work to do, and we are excited and driven to do it. As we continue our journey, it has been extremely rewarding for us and our teams to see the significant growth in our employee engagement customer satisfaction rates in 2018. As Karen pointed out, our employee engagement scores increased 12% to 49% of highly engaged, and our resident satisfaction scores increased 9.5% to 59% of very satisfied.
We are confident that these improvements in employee engagement and resident satisfaction will translate to higher occupancies and growth in cash flows for our unitholders over time. Thank you for your time and attention this morning, and we will now be pleased to answer any questions you may have.
Thank you. If you have a question, please press star one. If you're using a speakerphone, please pick up the handset before pressing star one. You may cancel your question by pressing the pound sign. Please press star one if you have a question. There will be a brief pause allowing you to register. The first question is from Chris Couprie from CIBC. Please go ahead.
Morning. Just wanted to talk about the organic growth outlook. It ticked a little bit lower this quarter for the retirement home business. Just wondering if you'd give us some comments there on your outlook.
Yes, Chris. Sure. Yes, it's been a little lower this quarter, but as we point out every time, quarterly number fluctuates and impacted by a number of items. We consistently guided to between 3% and 4% same property net operating income growth, and we expect to deliver that this year.
Okay. In other words, it sounds like Q4 in terms of growth rate should be a little bit better than Q3?
That's our expectation.
Okay. Can you talk about the competitive environment? Has it gotten any more challenging?
Chris, are you talking about new supply?
Yeah.
Yes. Not much really changed from the last time that we talked about. Its certain markets in Ontario, like Durham Region and Ottawa, continue to be very competitive, and there's more supply coming next year. The rest of the country is more stable. There's always a lot of activity going on in Quebec, but it is more in line with the penetration rates and population growth in that province. We are working on consolidating the supply data that we have here internally, and we expect to provide a bit more color to our investors with our Q4 filings. Generally, I can tell you not much has changed since the last time we talked about it.
Okay, great. Just curious, the TV advertising campaign that you guys are running, have you seen any kind of data back for it in terms of how it's helping you guys?
It's always hard to give a specific answer to that question. A couple of things we'd say is that certainly a lot of anecdotal response to it. We've heard back from numerous players around the country and in the U.S. that it's a terrific ad campaign, and we're getting very positive response from it. The only thing I could say is we look out at our numbers on a weekly basis, and we look at what it's going to look like next month or the month after that. The month of October had the highest number of people moving in or signing up to move in that we didn't expect to move in our history. I don't know, maybe that's due to the advertising, but I can't actually say that. I would just say it was a great result.
As I mentioned, our brand awareness, we were number one in Canada, so it certainly could have had an effect there, I would say.
Okay, thanks. I'll turn it back.
Thank you. The next question is from Jonathan Kelcher from TD Securities. Please go ahead.
Thanks. Good morning.
Morning.
Just on the Ontario occupancy, do you think that's bottomed where it is today? Where do you see that trending over 2019?
Well, yes, we certainly feel that the occupancy is probably one of the lowest levels that we've seen in Ontario in a while. We expect to grow from here. I would caveat this by also saying that usually we have the winter dip in Ontario that generally relates to flu season, that is hard to predict on how severe or not that is going to be. It looks better this year than it was before. That is always a big unknown. So we certainly do expect to grow occupancy in Ontario going forward.
Okay. The flu season is more of just a timing issue, correct?
Yes.
You usually get that occupancy back in the following quarters.
Correct.
Looking actually at the Batimo properties, it looks like there is a couple that are expected to be stabilized in Q1. Would you expect to purchase them in Q1 next year?
Yes. In accordance with our agreement with Batimo, once the property achieves stabilized levels of occupancy, we can purchase that property at that time. Once they hit those levels, we will start working with Batimo on the acquisition.
That could be Q1 or maybe drift into Q2?
Right.
Can you ballpark how much that would be for the two properties?
No, not at this time.
Okay. Then just lastly on The Sumach, how's pre-leasing going at that?
Pre-leasing is going very strong. We actually started disclosing in our MD&A the reservations numbers. You'll see that The Sumach is 52% pre-leased, there's very healthy traffic to the sales center, and we expect as the building getting closer to being completed, that the leasing will accelerate further.
Okay. Where do you expect to be on opening?
We underwritten about 60%. We're certainly optimistic that we'll be there, if not higher.
Okay, thanks. I'll turn it back.
Thank you. The next question is from Brendon Abrams from Canaccord Genuity. Please go ahead.
Hi, good morning, everyone.
Morning.
I see you've broken out the expected yields in your construction development versus your pre-development. It's a little lower on the pre-development side. I'm just wondering what's driving those lower yields, is it cost inflation or increase in construction costs that we've been seeing across the industry?
It's a combination of factors. Certainly, cost inflation is one. We are trying to be very conservative when we are underwriting these projects, particularly given the uncertainty for these projects that are in pre-development where the tenders have not been awarded yet. Generally, it would be the escalation in construction costs and, I guess, some outperformance on the projects that are in construction where we fixed costs a year or two ago. Now with the increase in rental rates, our expected income went up a bit.
I guess just a follow-up on that point. Does the new environment change your view on how you view development or your outlook on certain projects going forward?
For sure. We're taking a lot more conservative approach when we're underwriting these projects because of the fast acceleration in construction costs. If that continues, we may not be starting some of the projects. Our expectation though is that the construction costs will moderate in 2019, and the projects that we have here on the list in our MD&A will go forward.
Okay. Switching gears here, I know a significant portion of the rate you charge to residents is the accommodation of the rent part. With apartment rents rising in most markets across Canada, especially here in the Greater Toronto Area, how do you see this impacting your rates going forward? From your experience, is there a correlation or a lag here? Maybe if you could just provide some color insight on this.
Yeah, for sure. With the rising rental rates, particularly for the independent living seniors apartment product that we're building now, there is direct correlation to that. Our expectation is that our rents will follow the rise in the multi-residential rates. It's a little different with the all-inclusive product. We're competing more with the existing supply of retirement residences. As the rates go up, I think everything goes up.
Right. Just on the financing of your debt, how are you seeing rates these days and the movement there?
Well, we still finance the majority of our properties with CMHC-insured mortgages. Close to 70% of all our mortgages are CMHC-insured. The spread that we're paying on CMHC-insured mortgages is between 80 basis points and 100 basis points on top of the Government of Canada bond. We are financing properties right today at about 340, 350 all-in cost for CMHC-insured mortgages.
Okay, that's great. I'll turn it over. Thanks.
Thank you. Once again, if you have a question, please press star one. The following question is from Pammi Bir from RBC Capital Markets . Please go ahead.
Thanks. Good morning.
Morning.
Just wanted to clarify maybe one point on the lease-up losses and the imputed debt costs on developments. I think in the press release, you mentioned that the hit to year-to-date FFO was CAD 4.8 million, but I think in the MD&A, it indicates it at CAD 3.1 million. Just curious, what is the correct amount to use?
Pam, let me take this and get back to you on this one.
Okay. How do you see these lease-up losses trending just over the next 12 months, as you start some of these additional projects, some will stabilize, some coming online. Just curious how that figure trends.
Yeah. That item is very volatile, I would say. It's really depending on the timing of when we open sales center and start hire people to lease the new developments. That is offset by properties that are more mature in their pre-leasing activities and is already open and generate positive cash flow. That item is very hard to forecast. As you know, in the past, all these amounts would have been capitalized to the cost of development. In fact, that's how we underwrite all the projects.
Right.
If we're looking for a number between probably CAD 5 million and CAD 6 million a year would be a reasonable estimate, given the development pipeline that we have, but it could be very volatile from quarter- to- quarter or even year- to- year.
Okay. Just switching gears. Any update from a taxation standpoint? Are you expecting to be potentially, I guess, taxable in 2019, or are you able to push this out a little further? Just curious if you can shed some light on that.
We cannot provide an update at this point in time, but we will do it with our year-end filings.
Okay. Maybe just last question on the development yields. What sort of spreads relative to acquisition cap rates do you want to see sufficient to compensate for the risk of some of these projects?
Well, we're still looking at each project based on its merits and our risk assessments of these projects. Our targets remain the same. We're looking to at least create 10% value when we're building these properties, getting IRR at 250 basis points higher than our cost of capital, and have at least 100 basis points higher cap on cost or expected unlevered yield compared to what we think we could buy the comparative project at. I always caveat that by saying that there are no projects that are comparable to what we're building, in many cases, that are available to be purchased. That last metric is a bit more judgmental, I would say.
Right. Okay. Thanks very much. I'll turn it back.
Thank you. There are no further questions registered. I'll turn the meeting back over to Mr. Binions. Please go ahead, sir.
All right. 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.
Thank you. The conference has now ended. Please disconnect your line at this time, and we thank you for your participation.