Good morning, ladies and gentlemen. Welcome to the Chartwell Retirement Residences Q2 2018 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 and thank you for joining us today. There is a slide presentation to accompany this conference call available on our website at chartwell.com under the Investor Relations tab. Joining me today is Vlad Volodarsky, Chief Financial Officer and Chief Investment 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 at sedar.com. Guided by our vision of making people's lives better and our mission, values and culture beliefs, our key focus remains on delivering exceptional services and quality care to our residents. We believe that this key focus will be able to continue with this key focus, we'll be able to continue to build long term sustainable value and deliver growing earnings based on our 5 priority areas as shown on Slide 4. Our operating teams with the support of our corporate office departments delivered strong operating results in the Q2 of 2018.
Resident revenue increased $20,000,000 or 11 percent in Q2 2018 due to acquisitions and developments and revenue growth in our existing property portfolio. Same property adjusted NOI increased $5,300,000 or 8.2 percent in Q2 2018. In 2018 year to date, net income was $22,500,000 compared to $2,100,000 in 2017 year to date. As expected in the 1st 6 months of 2018, we've been utilizing our balance sheet capacity to fund our acquisition and development activities. As shown on Slide 5, at June 30, our financial position remained strong with total liquidity of $30,400,000 $7,000,000 of cash in our equity accounted JVs at our share.
Interest coverage ratio for the debentures remained strong at 3.4 2018 with a net debt to adjusted EBITDA ratio of 7.7 at June 30, 18. We are committed to maintaining sufficient liquidity and healthy earnings coverage ratios to allow us flexibility to execute on our strategic priorities and take advantage of attractive investment opportunities as they arrive. We continue to build value in our real estate portfolio through asset management programs, development of new properties and opportunistic acquisitions as shown on Slide 6. These value add activities are supported by extensive industry and market research and by rigorous risk management practices. So far in 2018, we opened 2 new residences.
Chartwell Saint Gabriel in Quebec is over 70% leased. Chartwell Bankside Apartments and Kitchener is over 40% leased. Work continues on our development pipeline of 17 50 suites with 5 projects in construction and 7 projects in pre development. Our pipeline of future acquisitions stemming from our partnership with FASIMO now consists of 9 projects with close to 2,800 suites. These programs have delivered and will continue to create value for Chartwell and grow our property portfolio with new efficient state of the art residences.
Our focus on portfolio optimization resulted in the sale of 4 non core properties in Quebec for $45,500,000 Karen Sullivan, our Chief Operating Officer is away on vacation today. So in her absence, I will provide an update on some of the operational highlights from the quarter. In Q2, we continued to shift our national marketing strategy from traditional print media to reflect higher investments in larger mediums, including TV, online, radio and regional cluster strategies. This consolidation of investments towards these higher impact mediums along with an increased focus on public relations and earned media through good news stories like Wish of a Lifetime Canada allows Chartwell to differentiate itself on brand awareness, reputation and message, while also increasing the efficiency of our spend and frequency and length of our media campaigns. This campaign includes the launch of our TV and digital brand campaign that consists of 3 spots each in French and English, reflecting Ask Aetna and La Concise de Teresa themes that will run until September 2019.
We will also be running radio ads from Boating Chartwell's National Open House in September. We've decided to focus our sponsorship strategy and investments with critical influencer categories that are trusted professionals for seniors and adult children as we more fully develop a business to business strategy. In Q2, our contact center responded to close to 5,000 sales inquiries, increase of 2% over Q2 of 2017 and 98% of these inquiries became leads and increased the number of personal visits booked through the contact center quarter over quarter by 40%. Finally, on the customer service side, we have more clearly defined the differentiators of our assisted living offering and we're beginning to roll this program out in our assisted living units in Ontario. We are also focused on improvements in dining service and food quality as well as our lifestyle and program offerings, the two areas that we believe are most important to our retirement home residents.
I'll now turn it over to Vlad to discuss our Q2 twenty eighteen financial performance.
Thanks, Brent. Shown on Slide 10, Q2 2018 net income was $7,000,000 compared to $6,300,000 in Q2 2017. This increase in net income is primarily due to higher revenues and the gain on sale of properties, partially offset by higher direct operating, general administrative and trust, depreciation and amortization expenses and financing costs. For Q2 2018, FFO was $48,900,000 or $0.23 per unit diluted compared to $41,900,000 or $0.21 per unit diluted in Q2 2017. The following items impacted FFO: higher adjusted NOI of $10,900,000 consisting of a $5,300,000 increase in same property adjusted NOI and $5,600,000 increase in contribution from acquisitions and developments, partially offset by higher G and A expenses of 1,900,000 dollars primarily related to our investments in supporting our growing development and acquisition pipelines and higher financing cost of 2,000,000 dollars In Q2 2018, combined same property occupancy was 91.2% compared to 92% in Q2 2017.
Turning to our operating platform results. As shown on Slide 11, our Ontario platform same property NOI increased $2,300,000 or 7.6 percent as rental rate increases in line with competitive market conditions, higher ancillary revenues and lower utilities and marketing expenses were partially offset by lower occupancies, higher staffing costs and communication expenses. In Q2 2018, same property occupancy was 86.2% compared to 87.4% percent in Q3 2017, primarily due to competitive pressures in certain markets in Ontario. In Q2 2018, our Western Canada same property adjusted NOI increased $1,700,000 or 13.5 percent, primarily due to rental rate increases in line with competitive market conditions, higher ancillary revenues and lower utilities expenses, partially offset by lower occupancies and higher communication expenses as shown on Slide 12. In Q2 2018, same property occupancy was 95.9% compared to 96.3% in Q2 2017.
On Slide 13, you will see our Quebec platform same property adjusted NOI decreased $100,000 or 0.9 percent in Q2 2018, primarily due to lower occupancies and higher staffing costs, partially offset by rental rate increases in line with competitive market conditions and lower marketing expenses. In Q2 2018, same property occupancy was 92% compared to 92.7% in Q2 2017. As shown on Slide 14, our Canadian LTC platform same property adjusted NOI increased 21.5% primarily due to higher ancillary services revenue, lower utilities and timing of certain expenses. Weighted average occupancy in the same property portfolio were 98.3% in Q2 2018 compared to 98.5% in Q2 2017. I'll turn the call back to Brent to wrap up.
Thanks, Vlad. As shown on Slide 16, we believe that by focusing 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 can 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 are putting the infrastructure in place to successfully execute on the significant development program we set for ourselves in 2018 beyond, and we are confident that these new state of the art properties will meaningfully contribute to enhancing the quality of our residents sorry, of our real estate portfolio and provide strong value creation to our unitholders over time.
We also remain open to and proactively seek additional acquisition and development opportunities in our core markets. Thank you for your time and attention this morning, and we'd now be pleased to answer any questions you may have.
Thank you. We'll now take questions from the telephone lines. Our first question is from Jonathan Kelcher. Please go ahead.
Thanks. Good morning. Good morning. First off, just on the G and A was elevated again this quarter and I guess in the MD and A it says to support a higher portfolio and more development. Do you think you're at the level, the G and A level now that you can sort of go forward with?
Vlad? Yes, Jonathan. We have been adding additional resources internally to support the growing development pipeline that we have and support acquisitions that we've completed recently. There are still some timing impacts that we have in the first half of the year. We expect the second half of the year in G and A will be lower than what we've been running in the first half, but it will be higher the overall G and A number will be higher than we originally guided people to.
So we expect between $10,000,000 $11,000,000 a quarter as the run rate for the remainder of this year.
Okay. And if you look beyond that, you have added obviously, you've added people. Can you is there room to grow the portfolio without adding additional people?
Well, we will always have to add incrementally depending on the size of the development and acquisition activities, but the adds in the future are not expected to be significant to our overall G and A costs.
Okay. That works. And secondly, maybe for you, Brett, this is more a question on how you think about new supply in your markets. And really, what I'm trying to get at is how close to one of your properties does new supply have to be in order for there to be an impact?
Well, generally speaking, we would we look at a 5 kilometer circle around our properties depending on where they are. That's kind of an average. Anything inside that has a will have a fairly significant impact in the short term. So that's kind of scale, if that's what you're looking for. But I would tell you that supply has definitely increased a fair bit in the marketplace, especially in Ontario.
Although, I would tell you demand has gone up quite nicely on occupancy as on occupancy, especially in Ontario.
Okay. When you say significantly faster than demand, are you talking like 7% versus 6% or can you maybe quantify that?
Probably 6 probably just maybe 5.5% versus 3%.
Okay. And do you expect that to continue for the next year or so?
Well, we expect demand to continue to go up. We expect supply to flatten out a little bit. But I think we need to build 600,000 suites in this country over the next 18 years. That's a lot of suites to build based on current supply. One of the things I would add to that is we are building a bunch of what we're doing into a market that has not been broadly built for in Ontario and Western Canada.
And the penetration rate in Quebec is 18%. It's 5% in Ontario. And we believe that what we're doing will actually increase demand in the marketplace, make more affordability, more expand the scope of people that are moving into retirement homes. And so we think as we start to get this into the marketplace and help people understand it better that a lot of the new supply is actually in a different piece of the market, and we'll be expanding the market.
Okay. That's helpful. Thanks. I'll turn it back.
Thank you. The next question is from Pammi Bir with Scotia Capital. Please go ahead.
Thanks. Good morning. Just on the same property NOI growth, a nice rebound this quarter and some of that is coming from rent increases. But when you look at some of the new supply and occupancy pressures, how do you see the ability to continue pushing rents at the same pace?
We're focused, Jaime, on sort of total revenue management and really focused on balancing the occupancy and rents at all of our properties. So where we see competition that's coming in and providing the same kind of services at a lower rate, we would be adjusting our rates down. If we feel that our properties are different from the competition in terms of the service provision, then we would keep the rates as they are. And we're a lot more focused on fully occupied properties or properties that are running at very high occupancy where we can adjust rents higher. So there's no question about the fact that the new competition often creates pressures not only on occupancy but on the rates.
But overall, we expect to continue to be able to drive rates at the levels that we've previously talked to you about, it's been kind of 3% a year.
That's helpful. And maybe just looking at the Ontario retirement homes. Again, we saw same property occupancy slip about 200 basis points from Q1. Can you maybe provide some more color on the drop there and the competitive pressures? Where are you seeing these?
And then secondly to that, what trend are you seeing through Q3 so far?
Sure. The drop, Pammi, is coming off of Q1 where we had that pretty significant flu outbreak again this year, stops people coming into visit. And so it has an impact on Q2 because you didn't have people in your homes doing their visits. And so Q2 continued to see a drop based on the fact that we had such widespread outbreaks. But our numbers on the go forward looking at the number of initial contacts and personal visits are positive.
And I add to that that our marketing efforts are more focused on the second half of the year. We are a little heavier in terms of our processes to get out more high density ads. You might have seen some of our television ads that if we started out there and they will continue right through the fall, which is the best leasing time. And we are optimistic that we will have very positive lease ups over the next 3 or 4 months.
And sorry, have you seen that trend pick up in so far in July August for the overall retirement home portfolio?
What we've seen is significant positive increase in the number of people coming into our properties. And we will be we don't actually give occupancy data on a month by month basis. We only do it at the end of the quarter, but we are quite optimistic as we move forward.
Thanks. That's helpful, Brent. Just lastly, just on the competitive pressures. Can you just expand on where they were, which markets you're seeing the most in Ontario?
Ottawa would be by far the heaviest new supply and the heaviest competition. We're also seeing a little bit of it in the Durham region, Oshawa, Pickering, Whitby, there's a lot of new supply coming in there.
Thanks very much. I'll turn it back.
Thank you. Our next question is from Walter Morgan with Roman Management. Please go ahead. Your line is now open.
Thank you. Speaking as an investor, I would like to see my faith over many years more tangibly rewarded and was struck by Mr. Binion's strong declaration on the Andrew McCreeve show on BNN recently that payouts would only increase at 2% per annum full stop. Could we not expect a more nuanced policy, payout policy taking into account Chartwell's overall operational and capital ability to pay distributions percent of available cash flow, balance sheet leverage, etcetera, etcetera?
We continue to look at on the basis that raising equity is very expensive. And we have a pretty aggressive growth pipeline out there on development. It creates huge value in terms of the corporation over time. We are we take a long term look at this. And in order to ensure that we have the ability to continue to build a new state of the art pipeline for this company into the future, we need to retain cash in the corporation.
And the more we pay out, the less growth we can do without going to the markets. And going to the markets is really expensive, and we'd rather use more of the internal cash flow to create value over the long term. So it is a balance, understand that, but that is the direction in which we are currently working. If we take a pause at some point in time in that, we could potentially increase what we pay out, but our thought process is let's invest the money and creating value for the future.
Next question?
Thank you. There are no further questions registered at this time.
Okay. Well, then that wraps up our 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.