Good morning, ladies and gentlemen, and welcome to the Chartwell Retirement Residences Q2 2023 financial results conference call. I would now like to turn the meeting over to the CEO, Vlad Volodarski. Please go ahead.
Thank you, Paul. 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 are Karen Sullivan, President and Chief Operating Officer, Jonathan Boulakia, Chief Financial Officer, Chief Investment Officer, and Chief Legal Officer. Before we begin, I direct you to the cautionary statements on slide two, because during this call, we will make statements containing forward-looking information and non-GAAP and other financial measures. Our MD&A and other securities filings contain information about the assumptions, risks, and uncertainties inherent in such forward-looking statements and details of such non-GAAP and other financial measures. More specifically, I direct you to the disclosures in our Q2 2023 MD&A under the headings, "2023 Outlook" and "Risks and Uncertainties and Forward-Looking Information" for a discussion of risks and uncertainties.
These documents can be found on our website on, or on the SEDAR+ website. Turning to slide three. Our Q2 2023 results clearly show that our strategies focused on acceleration of occupancy and cash flow recovery are working. We are at 80.4% occupancy in our same property portfolio in July, and expect to grow another 130 basis points by September, a combined 300 basis points increase from April of this year. With continuing improvements in closing ratios and solid leasing activities in all our platforms, I believe this strong trend will continue in the remainder of this year and beyond. Our recruitment and retention efforts have resulted in the continuous reduction of our reliance on agency staffing, with these agency staffing costs gradually decreasing throughout the year. Our residence managers vacancies are now at or below pre-pandemic levels.
It is important because stable leadership is key to smooth operations and the delivery of exceptional resident experience in our residences. I'm inspired by our team's agility in the rapid implementation of new technologies. This year, they rolled out a new customer relationship management system, upgraded our call center systems, implemented the recruitment module of our human capital management system, launched our new website and marketing automation system, and accelerated the rollout of our electronic health record system, almost doubling the number of planned rollouts to 60 properties in 2023. These systems improve our employee, residents, and prospects experiences, and over time, will create significant efficiencies in our operations. We continue our important portfolio optimization activities, divesting non-core, less competitive properties, where we had to make the difficult decisions to cease operations. Our operations teams, with their people-first approach, successfully transitioned most of the impacted residents to other Chartwell residences.
These residents obtained a superior accommodation and services, we have increased occupancies and cash flows in our core properties, and eliminated unsustainable losses in the underperforming non-core properties. Our 2023 employee engagement survey results are in. I have a high degree of confidence and trust in our team's ability to deliver exceptional results in all aspects of our operations, and because of that, I have high expectations. I must admit that our 2023 employee engagement results far exceeded these high expectations. 54% of the survey participants in our retirement operations indicated their high engagement, a 5 percentage points increase from our 2022 score, and only 1 percentage point short of our 2025 aspirational target of 55%. The combined engaged and highly engaged score was 84%, and participation rate increased 8 percentage points to 77%.
Thank you to all Chartwell employees for your commitment to our residents, their families, and each other, and for your deep and personal connection to our shared values and goals. On that note, I will turn the call to Karen to provide an operational update.
Thanks, Vlad. Moving on to slide four, we're seeing significant signs of occupancy recovery. Our initial contacts are up 6% year-over-year, but as importantly, our marketing strategies are leading to higher quality prospects in our pipeline, as evidenced by improved personalized tours and permanent move-in rates. These strategies included changes to our Google and paid social media tactics, as well as a focus on priority properties with unique resident-specific messages and calls to action, using a range of mediums, including print, radio, billboard signage, direct mail, and digital ads. In Q2, our brand campaign focused on affordability and was deployed through sponsored content, paid social media, videos, and television. June year-to-date lease volumes are the highest total on Chartwell record and on a comparative same property total portfolio basis, 11% or better than any year going back, as far as 2015.
We had 25 consecutive positive net activity weeks, fueled by closing ratios, which increased from 9% in Q1 to 15% in Q2. We continue to make investments in our technology to assist with sales and marketing. This included implementing an updated call center phone system for our click-to-connect agents that includes significant enhancements to monitoring and reporting. I also invite you to check out our fully updated website, chartwell.com, designed for an enhanced customer experience, along with a goal of better organic, organic traffic and improved conversions. The revisions include expanded property-specific information and enhanced pricing transparency. The site integrates with our new marketing automation tool, Eloqua, and our sales system, Yardi Senior CRM. This integration reduces the administrative work of our salespeople and allows for automated prospect nurturing strategies.
Other sales strategies in Q2 included a successful open house, which resulted in over 1,100 new prospects, with traffic being highly qualified, as evidenced by high conversion rates of new ICs to PMIs occurring in the following weeks. Turning to Slide five, employee vacancies and turnover decreased in Q2 compared to Q1, and staffing agency spend continued to decline for the third straight quarter, decreasing by 24% in Q2 compared to Q1. We continued our focus on recruitment and retention efforts, including the first release of Oracle Recruiting Cloud, which was launched in May. This technology reduces manual administrative work, allows for more efficient tracking of candidates, and improves speed to hire. We are focused on recruiting registered staff, including hiring a seasoned nurse recruiter who is developing and implementing Chartwell-specific nursing recruitment strategies.
We also completed an RFP in Quebec to reduce the number of staffing agencies we are using and to improve contract terms and conditions. In addition, we recently developed and implemented, enhanced and enhanced accountability for our residences that are using staffing agencies through new workforce activity tracking, approval, and reporting. We've also now completed staffing optimization in 100% of our retirement residences. This has allowed us to standardize our staffing levels and staffing schedules based on occupancy, occupancies and revenues across our residences. Finally, the care and operations team continue to roll out Yardi's electronic health record in our retirement homes, having already completed the implementation in 34 of our residents, with an expectation that we will have 60 finished by the end of the year. This tool will automate our assessments and care plans and assist us to capture and bill care services more effectively.
I will now turn it over to Jonathan to take you through our financial results.
Thank you, Karen. As shown on Slide six, in Q2 2023, net loss was CAD 7.5 million, compared to net income of CAD 1.1 million in Q2 2022. This net loss included CAD 3.1 million of negative change in fair value of financial instruments, primarily from the increase in trading prices of our trust units, compared to a positive change in fair value of financial instruments of CAD 7.2 million in Q2 2022. Total FFO in Q2 2023 was CAD 0.13 per unit, and FFO from continuing operations was CAD 0.11 per unit, both consistent with Q2 2022. While FFO per unit was consistent with the prior year, operating results in our core property portfolio have shown a strong improvement.
Our same property occupancy increased 1.8 percentage points to 79.2%, and adjusted NOI increased by CAD 4.5 million, or 8.7%. This growth was offset by CAD 1.9 million higher G&A expenses, primarily due to severance costs and higher unit-based compensation expenses resulting from the increase in the trading price of our units, CAD 1.2 million costs related to the closure of our underperforming non-core properties, and higher finance costs from higher balances on our credit facilities and rising interest rates. Slide seven summarizes our same property operating platforms results. All our platforms posted occupancy gains in Q2 2023, compared to Q2 2022, which positively impacted our results. Our Western Canada platform, same property adjusted NOI, increased CAD 2.3 million or 16.4%.
Q2 2023 included a one-time reversal of certain staffing cost accruals of CAD 1.7 million upon settlement of contracts, for which there was not a comparable amount in Q2 2022. Our Ontario platform, same property adjusted NOI, increased CAD 1 million or 3.5%. Q2 2022 included higher recoveries of pandemic expenses of CAD 1.7 million, for which there was not a comparable amount in Q2 2023. Our Quebec platform, same property adjusted NOI, increased CAD 1.2 million or 13%, primarily due to the 210 basis points occupancy growth. Turning to Slide eight, our same property retirement portfolio occupancy was 80.4% in July. We forecast it to grow another 130 basis points to 81.7% in September.
We continue to see positive trends in our personalized tours, closing ratios, and lease signings, which sets us up well for our usually strong fall leasing season. We're also achieving our expected rate increases and expect to continue reducing our staffing agency spend throughout the remainder of the year. Turning to Slide nine, at August 10, 2023, liquidity amounted to approximately CAD 194 million, which included CAD 26 million of cash and cash equivalents and CAD 168 million of borrowing capacity on our credit facilities. For the remainder of 2023, we have CAD 121.5 million of debt maturing at a weighted average interest rate of 3.68%, of which CAD 39.6 million is CMHC insured. Refinancing of these mortgages is expected to proceed in the normal course.
At August 10, 2023, 10-year CMHC insured mortgage rates are estimated at approximately 4.5%, and five-year conventional mortgage financing is available at 5.9%. We received regulatory approval for the sale of our Ontario Long-Term Care platform. This sale is scheduled to close in September and generate after-tax net proceeds of approximately CAD 206.3 million, which we intend to use to pay down our credit facilities. The sale of Ballycliffe Long-Term Care, currently in redevelopment, is expected to follow in Q1 2024 and generate after-tax net proceeds of CAD 62.9 million. In December 2023, our senior unsecured debentures with a face value of CAD 200 million will mature. We expect to refinance these debentures with new senior unsecured debentures or other unsecured or secured debt, subject to market conditions.
To de-risk this maturity, we arranged a CAD 200 million delayed draw credit facility with a syndicate of Canadian financial institutions. This credit facility is available anytime prior to December 11, 2023, and if drawn, will have May 29, 2025, maturity date and will be subject to substantially the same covenants and pricing as our existing unsecured credit facility. I'll now turn it back to Vlad to wrap up.
Thank you, Jonathan. Turning to slide 10, there is a significant embedded potential value in our portfolio, and we are committed to realizing it. Occupancy is key in this value creation, and our teams are focused on execution of our operating, sales, marketing strategies to accelerate this growth. We continue our work to optimize our portfolio, investing capital in our core assets to ensure their continuing competitiveness, repositioning properties requiring more complex strategies, and divesting non-core assets. I'm confident that these initiatives, supported by the strong demographic trends, improving consumer sentiment towards retirement living, lower new construction starts, and continuing shortages of long-term care beds across the country, will deliver sustained growth in 2023 and beyond, and will help us to achieve our aspirational 2025 targets in employee engagement, resident satisfaction, and occupancy.
I'd like to finish by telling you a story of one of our new residents, pictured on slide 11. Not only do I find the stories of our residents and staff heartwarming, but they're also extremely important because they speak to the impact we have on our residents' lives, the lives of their families, and the communities in which we operate. They speak to the kind of company Chartwell is and the kind of culture we have. They are deserving to be shared. During a walk-in tour at Chartwell Empress Kanata, an individual who does not speak English asked for a tour by using his phone to translate Mandarin to English. Tina, the retirement living consultant, met with him and showed him a studio suite. However, without Google Translation, it was challenging for them to communicate.
It was then that Tina realized the residence has two frontline employees on their team who speak Mandarin: Joanne, a housekeeper with over 15 years of experience, and Jenny, a cook for over three years. Both ladies were able to have a wonderful conversation with the individual about the food, housekeeping, the suites, and much more. He ended up coming back shortly after and signed a lease at Chartwell Empress Kanata. To me, this is a great example of empowerment of our frontline employees, the team-up approach to sales, and importantly, diversity and inclusion that is being fostered in our communities. We would now be pleased to answer your questions.
Thank you. We will now take questions from the telephone line. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on the device's keypad. You can cancel at any time by pressing star two. Please press star one at this time if you have a question. There will be a brief pause while the participants register. We thank you for your patience. The first question is from Jonathan Kelcher from TD Cowen. Please go ahead. Your line is open.
Thanks. Good morning. First question, just on the agency costs, good to see them coming down, quarter-over-quarter. How, how close to pre-pandemic levels are you on that, and, and when do you think you can, can get there?
We're probably still 30%-40% higher than what we were before the pandemic. Our goal is to get there and hopefully lower than that over time. You know, exact timing is hard to tell. As Karen pointed out, we're 24% quarter-over-quarter. If this pace continues, and we're doing everything we can to maintain that pace, then we'll be there quicker.
Okay. Last quarter, I think you guys talked about getting your, your margins back to, well, at least close or very close to, to pre-pandemic, levels in 2024. Do you still think you can do that?
Yes, that is still our expectations. you know, labor costs continue to go higher. We are, as you know, put a higher rent increases this year. Probably have to do something similar next year based on the market conditions and the cost inflation. We think we'll be in the kind of mid-30 margins at the end of this year and on our way to pre-pandemic levels in 2024.
Okay. Are you getting any pushback on, on rent increases?
No. I, I mean, I, I, I would say overall, it's, it's, it's, it's typical of what it's always, always been. A little bit more pushback in, in Quebec, nothing that I would suggest is abnormal. I think there is some, you know, overall sense from our, from our residents. They certainly pay attention to what's, what's going on overall with inflation, it's, it's going quite well.
Okay, last one for me, just on the G&A was, it's, it's a little bumpy in the quarter, and I, and I guess it, it'll continue to be so until the long-term care deal closes. What, what would you say would be a normalized sort of G&A, and that we could maybe sort of run for 2024, or run a little bit of inflation off for 2024?
You're right. It was bumpy in the first half of the year, and we wouldn't expect the second half to necessarily be reflective of that. Wouldn't double the first half to come up with an annualized number. We think this year we're probably going to be running at about CAD 56 million-CAD 58 million by the end of the year. And that's probably the right annualized number, but we continue to look at ways to reduce our G&A overall.
Okay, thanks. I'll turn it back.
Thank you. The next question is from Pam Bir from RBC Capital Markets. Please go ahead. Your line is open.
Thanks. Just, you know, great to see the, the occupancy strides. As you think about maybe the next 12 months or so, what are some of the things that might impede the momentum that you've, you've generated so far? You know, from a competitive standpoint, maybe more aggressive, or maybe just tougher leads up in some more challenged markets. Just curious as to, you know, how much further we can expect this momentum to continue. Thanks.
Well, as I mentioned, I do have high expectations. I expect this momentum to continue and maybe even accelerate. This question is hard to answer for me, because I've been asked this question many times about the potential headwinds, and it's really difficult to see in the current environment. The headwinds, I guess, another wave of pandemic or something that we don't know, obviously, can always be a factor. But if you look at the demographic growth of the senior population, of low construction starts, of continuous lack of Long-Term Care beds, and improving consumer sentiment, I think this sector, not just Chartwell, but everybody, is really poised to this accelerated growth. That's why we continue to maintain our aspirational target of 95% occupancy by 2025.
not because we don't think we can-- because we think we can get there with all this backdrop. you know, what can impede it other than another pandemic type event, that, that is hard to foresee right now, I cannot really see any of, of that. Could be faster, could be slower, I think direction is pretty clear.
Got it. I think, you know, in the past, you, you talked about that 89% pre-pandemic level. Is that, is that sort of you talking, I guess, 95% by 2025, is 89%, you know, reasonable target for, for 2024, by the end of next year?
Yeah, I mean, that's certainly what we will be striving, towards.
Okay. then just coming back to the agency costs, I, I think, you know, pre-pandemic, they were, they were 3% of revenue. where are they now?
I mean, I think I answered that question a different way, Pam, not as a percentage of overall costs. I think Jonathan asked about how, how far are we from the pre-pandemic levels, and we are about 30%-40% higher right now. With the pace of reduction that we saw quarter-over-quarter, from Q1 to Q2, it was 24%. We'd probably be there within two to three , maybe four quarters. It should, it should continue to come down, and we have full intention to do everything we can to hire as many as possible of our own people, so that we can deliver better and more consistent services to our residents and control costs better.
Okay. Then just one last one for me. With respect to the projects with, with Batimo, I, I think one more property is stabilized at this point beyond the one that you announced this quarter that you expect to acquire. Just on that second property, are you anticipating them to exercise their, their put rights there as well? If so, when might that happen?
Yeah, we, we have a continuous open dialogue with our partners at Batimo. We're working through this process on Trait-Carré right now. We don't expect in the short term to be going through the same process with them on the second property. Of course, they, as you mentioned, they have that right, but we're, we're in constant dialogue with them, and we expect that to be.
... not happening in the, in the near term.
Great. Thanks very much. I'll turn it back.
Thank you. Once again, please press star one on the devices keypad if you have a question. The next question is from Himanshu Gupta from Scotiabank. Please go ahead. Your line is open.
Thank you, good morning. Just on NOI margins, I think your target was mid-30% NOI margin in second half of the year. I mean, given that occupancy is tracking higher than your target so far, is there upside potential to this number?
Potentially, but at this time, we would maintain getting to mid-thirties this year and close to pre-pandemic levels by the end of next year.
Okay, fair enough. Then, Vlad, on distribution, any updated views there, especially in the context of occupancy gains you are seeing there? I mean, are you seeing any elevated maintenance CapEx expenditures, and are you factoring that as well?
We always look at our total cash flow projections when we talk about distributions, and we're still clearly over-distributing. There's no, you know, secrets about that. Our expectation, as we previously communicated, we'll be covering our distributions with AFFO at the back end of this year and on a full year basis next year. By the back end of next year, we will be very close to covering our full capital with our operating income, operating cash flows.
Got it. Thank you. Maybe, you know, just turning to balance sheet, CAD 200 million of unsecured debentures coming due, I think that's December. What are your rate expectations if you were to go to unsecured market today?
Probably high sixes at the present time.
I think so. Okay. Is there any room to do more CMHC debt financing, like secured financing with CMHC, which could have a better rate than the unsecured venture market?
Absolutely. I... That, that is another benefit of growing occupancy. As you know, it's a lot easier and more efficient to put CMHC mortgages on the properties that are at stabilized occupancy levels, as opposed to that are still in lease-up. So the more of those properties that we have, the more CMHC debt we can access, and our teams are working really hard to monitor that and maximize CMHC-insured borrowings so that we have that, that lower cost of debt in our structure and more of it.
Do you need to get to a certain occupancy level or a certain NOI margin before you can qualify for up financing for CMHC in some of the properties?
No, it's more efficient when you have a history of higher occupancy. You get better leverage with CMHC, and therefore, it's just easier to manage that kind of portfolio.
Okay. Maybe, you know, just a CAD 120 million mortgage is coming due, for the, I think, the second half of the year. Will everything will be done with CMHC, or, there's something which doesn't qualify for CMHC debt financing?
No not everything will be CMHC. But also remember, we will have proceeds from the sale of Ontario Long-Term Care portfolio coming into our structure, and these proceeds are intended to be used to pay down debt. Some of the mortgages that may not be qualified for CMHC will be paid down from those proceeds.
Awesome. Okay, maybe just last one, then, you know, back to the occupancy side of things. Looks like Quebec, in particular, is showing some good occupancy improvement. Is there any specific markets which are doing better in Quebec?
Yeah. Certainly, it's been great to see Quebec City starting to come back. They're performing very well on signed leases, and their futures look, look really good. The other markets that we talked to you about that have been challenging are also starting to improve, so Durham and Ottawa. Calgary, maybe a little bit slower. We have pure independent living there, and so it's a little slower to come back. That's pretty consistent with the overall trends. There's, you know... The occupancies come back more quickly where in terms of needs-driven properties.
Okay. Thank you so much, and very helpful, and I'll turn it back.
Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Volodarski.
This 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. Goodbye.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.