Good morning, ladies and gentlemen. Welcome to the Extendicare Inc. 4th Quarter Conference Call. Please be advised that this call is being recorded.
I would now like to turn the meeting over to Ms. Jillian Fountain. Please go ahead, Ms. Fountain.
Thank you, Kate. Thank you, and good morning, everyone. Welcome to Extendicare's 4th quarter year end 2019 results conference call. With me today is Extendicare's President and CEO, Michael Greer and Senior VP and CFO, David Bacon. Our 2019 Q4 results were disseminated yesterday and are available on our website along with the supplemental information package.
The audio webcast of today's call is also available on our website along with an accompanying slide presentation, which viewers may advance themselves. A replay of the call will be available later this afternoon until March 13. The replay numbers and passcodes have been provided in our press release as well an archived recording of this call will be available on our website. Before we get started, please be reminded that today's call may include forward looking statements regarding our future operations. Such statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied today.
We've identified those factors in our public filings on SEDAR with the securities regulators and suggest that you refer to those filings. As we discuss our performance, please bear in mind that all figures are in Canadian dollars unless otherwise noted. With that, I'll turn the call over to Michael.
Thanks, Jillian, and good morning, everyone. In the Q4 of 2019, we continued to advance our strategy for sustainable long term growth. With our long term care operations continuing to provide a stable base, we expanded our retirement living operations with the opening of a new 124 suite community in Barrie, Ontario, which continues to experience very strong demand in that market. We also continue to advance our plan to expand our Empire Crossing retirement community in Port Hope, with the construction starting in the Q2 of this year. The SGP network continued to show strong growth during the quarter, bringing on a number of new customers, increasing the number of seniors covered by our services to 64,800 at the end of 2019, up 26% year over year.
Progress continues on our ParaMed transformation with 95% of our targeted volumes now on the new IT platform with only our Alberta operation left to migrate to the new platform in 2020. We continue to enhance our operations to provide excellent care to the growing number of Canadian seniors wherever they need it, as they age and as their care needs change. Our growth efforts are supported by a strong market demand, enabled by continuing investments in our people and technology. Turning to Slide 4 and our ParaMed business, We successfully completed our transition out of the negative margin BC Home Health market in January 2020. This transition entailed the transfer of 1100 employees and over 1,000,000 home care hours to the BC health authorities.
This transition now removes the adverse impact of the BC operations on ParaMed's profitability going forward. In 2019, we focused on delivering high quality services while upgrading our systems to improve our ability to meet the increasing demand for home health care. The new platform is automating work processes to improve scheduling, reduce staff turnover and provide better support for our staff as they deliver services. In the Q4, we made good progress on our implementation, ending the year with 89% of the targeted volumes converted to the new system. This progress has continued in 2020.
So today, we have migrated 95 percent of our volumes with only Alberta remaining. We expect to complete the implementation within the original project budget of $12,000,000 The new system, coupled with optimization of the operations, will drive volume increases this year with margin improvements coming later in 2020. As we implemented the software, we added to our back office staff in preparation for the planned increase in volumes. This investment in our long term infrastructure sets us up for future success. However, the associated costs compressed NOI margins over the course of 2019.
As we build our volumes to deliver all the home care referrals coming our way, we expect our margins to return to historical levels in the medium term. Moving to our long term care operations on Slide 5. LTC continued to provide a strong foundation for our business. The average occupancy at our homes remained stable at over 97% for the quarter the year. Funding enhancements during 2019 helped drive an increase in revenue in the Q4 and our NOI margins remain consistent.
Both the Ontario and Alberta governments are undertaking a review of their long term care operating funding models with a view to potentially reduce costs and improve system performance. Extendicare, together with provincial industry associations, continues to be actively engaged in those discussions in respect of the funding models. As part of the funding changes, the Ontario government indicated last year plans to eliminate the structural compliance premium funding for eligible beds effective April 1, 2020. This represents funding of $1,300,000 annually for Extendicare. Discussions are ongoing with the government about this reduction.
In addition, we continue to work closely with the Ontario government to advance the long term care building program, including possible changes to the application and licensing process and the capital funding subsidy. The critical state of long term care and the pressing need for additional beds to address the hallway medicine problem faced by hospitals keeps this issue at the forefront of the public policy agenda. We are optimistic that the collaboration between the industry and government will enable the changes needed to get construction underway. Extendicare's projects are in various stages of planning and approvals, but none are currently under construction. We continue to focus on planning until we have greater clarity on the financial and other aspects of the program.
Now turning to Retirement on Slide 6. This segment performed well in the 4th quarter, showing revenue and NOI growth and stabilized occupancy averaging 94.9%. In 2019, we grew our retirement living capacity by almost 30%, adding 236 new suites, including the Berryview Retirement Community, which opened in October. Based on the strong presale activity and initial occupancy levels at this property, we expect to achieve stabilized occupancy of 95% by the end of this year, much earlier than originally anticipated. Plans have advanced at our Empire Crossing retirement community in Port Hope, Ontario for a 59 suite expansion.
We expect to break ground in the Q2 of 2020. On to slide 7, our assist contract services and group purchasing services continue to show strong growth with 7% revenue growth in both the Q4 and for the full year. At the end of 2019, FGP, together with our partners, provided cost effective products and services to approximately 64,800 senior residents across Canada. In January, we were delighted to welcome Amica Senior Lifestyles, another outstanding seniors care organization, to join our client roster, bringing our coverage to approximately 71,600 residents as we start the New Year. We continue to develop opportunities to expand SGP and Assist through additional services and product offerings and by expanding the geographic reach of our sales team.
With that, I'll now turn to David Bacon, our Chief Financial Officer, to provide insight into our financial results from the Q4. David?
Thanks, Michael. I'll first provide an overview of our overall corporate financial performance for the Q4 of the individual business segments. Turning first to Slide 9 and our results. Revenues grew 0 point percent in Q4 and 1.1 percent for the year, largely driven by long term care funding enhancements, growth in the retirement segment as well as retroactive Bill 148 Home Healthcare Funding received in the 2nd quarter, partially offset by the decline in Home Healthcare volumes. Net operating income in Q4 was unchanged compared to Q4 2018, reflecting higher revenues and the impact of labor accrual adjustments offset by lower home health care volumes and increased back office operating costs.
Net operating income for the year was down 0.4%. As a result, our NOI margins were lower by 10 basis points in Q4 at 11.3% and by 20 basis points or 11.8% for the year. Adjusted EBITDA increased modestly in Q4 due to lower administrative costs. Adjusted EBITDA for the full year was down $3,100,000 or 3.3 percent, reflecting the year over year decline in NOI and increased administrative costs in part due to the ParaMed transformation. Adjusted EBITDA margins for the full year were 8%, down from 8.4% in 2018.
AFFO in Q4 decreased by $1,200,000 to $11,400,000 compared to Q4 2018, driven by higher maintenance CapEx and interest costs, partially offset by lower current taxes. For the full year, our AFFO declined by $5,200,000 or 8.9 percent, driven by the earnings decline and increased interest costs. Our dividend remains an important way to return value to our shareholders. And in 2019, we declared dividends of 42,700,000 dollars representing a payout ratio of 81% compared to 73% in 2018. Turning now to Slide 10.
And as with prior quarters, we have summarized some key factors that impact the comparability of Q4 and 2019 to their respective comparative periods. Our Q4 and 2019 results were impacted by Bill 148 retroactive home health care funding received in Q2, severance costs in Q3, the ParaMed transformation and the impact of IFRS 16. In Q4, our results were impacted by favorable label accrual and other year end adjustments of $900,000 in Q4 $600,000
for the
full year 2019, which primarily impacted our LTC results. The net impact of these factors led to an increase of $900,000 in NOI and $1,200,000 in adjusted EBITDA when comparing Q4 2019 to Q4 2018. Turning now to Slide 11 briefly. Adjusting for the factors that I've just outlined, our consolidated NOI is down by 2 0.7% in Q4 and 2.4% for the full year and margins are lower by 40 basis points in both Q4 and for the full year 2019, which reflect the decline in impairment volumes NOI margins offsetting the growth in long term care and retirement. Similarly, adjusted EBITDA was down by 3.1% in Q4 and 6.9% for the full year over 2018, reflecting the drop in NOI and higher administrative costs.
Adjusted AFFO for the full year would be $55,300,000 down 11.2% from 2018, and our payout ratio for 2019 would be 77% as compared to the 81% as reported. Turning now to our individual business segments and first to our Home Health Care operations on Slide 12. When we exclude the impact of the previously noted factors, NOI from our Home Healthcare operations was $6,900,000 for Q4, down 18.1%, largely driven by lower volumes and higher back office operating costs. The NOI margin was 6 0.5% for the quarter compared to 7.7% in the Q4 of 2018, as lower volumes and increased support staff decreased our profitability. Volumes from our home health care operations declined by 3.2% in Q4 and 3% for the full year.
While volumes were down year over year, we did see a modest sequential increase of 0.3% in Q4 as compared to Q3 of 2019. As Michael noted, we completed the successful exit from BC in January. Our NOI margins in 19, excluding BC, would have been 110 basis points higher or 8.7% for the year. In addition, our total volumes for 2019, excluding BC, would be approximately 9,300,000 hours. Turning now to our Long Term Care operations on Slide 13.
After adjusting for the factors impacting comparability, our Q4 2019 revenue grew by $2,000,000 or 1.2 percent then our NOI increased by $300,000 or 1.7% compared to Q4 2018. And NOI margins were 11.5%, up slightly from 11.4% in Q4 2018. NOI growth was driven primarily by Ontario flow through funding envelope increases, offset by increased cost of residents care and higher operating and labor costs. NOI margins for the full year, after adjusting for the factors impacting comparability were 11.9%, up from 11.5% in 2018. Turning now to our Retirement segment on Slide 14.
Net operating income from the Retirement Living operations increased $700,000 or 31.4 percent to $3,000,000 in Q4 compared to Q4 2018. This improvement was primarily driven by growth in our average occupancy from same store operations to 95.8% in Q4 compared with 88.3% in Q4 2018, partly offset with early lease up and pre opening losses from our non same store retirement communities. Our strong lease up activity continued in the 4th quarter and 2 retirement communities, Douglas Crossing and Yorkton Crossing, were classified as stabilized, having achieved targeted occupancy levels, with stabilized occupancy at year end of 95.1 percent, up sequentially by 100 basis points from Q3 2019. Turning to our final segment, our Assist and SGP business. Revenue increased more than 7% for the full year with growth in residents served by SGP growing more than 26% year over year.
NOI from the contract service consulting and group purchasing operations declined slightly in line with expectations resulting in an NOI margin of 55.7 percent for Q4 and 55.5 percent for the full year as back office costs were increased in 2019 to support the growth experienced in the past 2 years as well as the increased volumes coming online with new customers added in January, which included Amica, which brings our total residents now served to over 71,000. Finally, turning to our financial position on Slide 16. The company's consolidated cash and short term investments at year end were $94,500,000 and the company has approximately $65,000,000 available to draw under its credit facilities. In Q4 2019, we repatriated US10 $1,000,000 of cash from the captive and subsequent to year end have initiated a further repatriation of US7 $1,000,000 which we expect to receive in the 2nd quarter. Our interest coverage and debt to gross book value metrics remained strong at year end at 3.1 times and 49%, respectively, and our debt maturity profile is well positioned.
With that, I'll pass it back to Michael for his closing remarks.
Thanks, David. The changes we are making to our business are part of our strategy to drive sustainable growth and profitability. 2019 was a transition year for our ParaMed operations. With the transformation project now almost complete and our exit from the BC home health care market behind us, we expect to drive growth and performance improvements in this segment in 2020. These changes combined with our solid long term care operations, continued growth in Assist and SGP and lease up activity in the Retirement segment position us for sustainable value creation for our shareholders in 2020 beyond.
Our dedicated team members are focused on improving the quality of care we deliver to meet the needs of Canada's growing seniors population. With that, we'd be happy to take any questions you may have.
Operator? Thank you. We will now take questions from the telephone And our first question is from Tal Woolley from National Bank Financial. Your line is open. Please go ahead.
Hi, good morning. Hi, Tal.
I'm just wondering if we could talk a bit about the flu season and everything that's going on, obviously related to that. Can you just talk about what your sort of internal view is and what sort of preparedness steps you're taking right now?
So Tal, when you say flu season, are you talking about the COVID-nineteen?
I'm talking about both, I think. So just the how is the current sort of I don't know what the right medical term is, but traditional flu season is? And then maybe if yes, we could just talk about the COVID stuff too because it is coming up a little bit with clients?
Sure. Yes. So on the flu season front, it's pretty much been par for the course this year. We've we're starting to be in the downslope of the season as we get into the spring. So it's not been anything different from what we've seen in the past.
As far as the COVID-nineteen story, I don't want to understate the significance of this virus, but we also shouldn't be alarmist about it either. We're dealing with a new pathogen that has a profile that is very similar to influenza. The only difference is the absence of a vaccine, which does make it a danger for our residents and clients. But we have very well developed protocols for dealing with respiratory outbreaks, and these are ideally suited for the COVID-nineteen prevention. So the team knows what to do and so we're continuing to do it.
It certainly looks like the likelihood of community transmission in Canada is becoming more probable as we watch things play out around the world. If so, we're prepared to ride it out as we do every flu season. The one additional consideration I'd point out is the possibility that the hype around this new virus results in increased absenteeism among our staff. But the fact that it's generally a mild illness in otherwise healthy adults should help to mitigate that risk. So in our view, it's very similar to influenza in its profile and what we need to do about it.
The thing that makes it more difficult is watching the news coverage every day and the hype associated with it.
Okay. And then just looking at the SGP, SGPC business, you've made strides on the revenue front. When should we expect to see the NOI return to growth after the investments you've made?
I think right away. So we made those investments and we're seeing a 55% margin now. It's a little bit lower margin than we've seen in the past. We've really made a decision to trade off a little bit of margin for faster growth. And that seems to be playing out much the way we expected with significantly larger client base now.
And we have a significant pipeline of additional potential clients to join that business. So I think our growth going forward will show the same margins that we've seen in the past. And so you'll see the NOI growing in tandem with the revenues.
Okay. And then just lastly, a lot of the focus in the retirement business has been on completing developments and leasing them up. But you would certainly be getting into renewals at a lot of several of your facilities. What is the rent growth that you're trying to seek right now in your retirement business?
Yes, it's Tal. It's David here. So from a rent perspective, you're looking in the sort of in the 2% to 2.5% range overall across our portfolio. Obviously, Ontario market is a little different than Saskatchewan on that front, but on an overall basis, that's sort of the range.
Okay, perfect. Thank you very much.
Thank you. Our next question is from Lorne Kalmar from TD Securities. Your line is open. Please go ahead.
Thanks. Good morning. Hi, Lars. Good morning.
So there was a in regards to the Ontario government announcement maybe back on, I think, February 25. Could you give a little bit more color on the impact that may have on the home health business, if any?
Yes, sure. Sure. So the essence of that legislation is to recreate the or isolate the old CCAC structure and spin it out from the new Ontario Health Agency into a separate organization. The regulations under that legislation have yet to be drafted. So the details will be important.
And we're in the midst of a consultation process now around that. So there's lots of opportunity for the industry to have input into that into the drafting of those regulations. I think the key elements of the legislation is that it continues the contract services model that we've been operating under for a long time. What it does though in terms of changes is introduces flexibility and where coordination can be provided. That's been provided in the LINZ or the CCACs consistently up until now.
And the legislation makes it more flexible so that helpful in providing helpful in providing closer collaboration with hospitals and doctors' offices from a home care perspective, but we don't see it having a material impact on our business. There's also language there about removing caps on services, but it's unclear how this will work within the provincial budget framework. So it sounds good from a volume growth perspective, But until we see what those regulations are, it will be very hard to interpret. So in short, I think it's another sort of incremental step in evolving the Home Care business. The emphasis is on stability and incremental change.
I think it will take time for any of these changes to have any kind of significant impact in the industry. And in particular, I don't think it will have any impact in 2020. And we'll start to see some influence on the market in 2021. I think net, Lauren, I think it will be positive for us. The investments we've been making in our cloud based solution make us the only large home care provider in the province on a cloud based platform.
It positions us very well for integration with hospitals offices and other providers we think will struggle with that because they've not made the investment to move to a cloud based solution at this point. So we think we're strategically well positioned to take advantage of any opportunities that come into the market as a result of the government's changes.
Okay. That's great. Thank you for the color. And then just sticking with ParaMed, have you guys seen any upticks or improvements in recruiting?
We have, in fact. And one of the things that we're moving forward with is creating an in house training program to build our own capabilities. We've launched that now in a couple of our districts. We're also cooperating with some of the other home care providers in the province, and we're actually sending some of our staff to their training programs. So there's a lot of cooperation across providers.
So I'm quite optimistic about how that's going to help us to build up the team.
Okay. Sounds like 2 pieces
of good news on that front. And then just lastly from me, when do you guys expect to have that Port Hope expansion done?
Yes. We're looking to break ground in the spring. So April, depending on the timeframe, it's about a 14 to 16 month construction plan. And then we're looking at leasing up 2 years thereafter.
Okay, great. Thank you guys so much. I'll turn it back. Thanks.
Thank you. Our next question is from Josh Senko from Laurentian Bank. Your line is open. Please go ahead.
Hi. Good morning.
Good morning. Good morning, guys.
So what kind of volume growth are you seeing in your home care division over the last 2 months?
Well, yes, I think we are seeing some growth. But at this point, I'm not prepared to quantify it. To see to see as a result of having built the new system. As I've mentioned in the past, we always have kind of a 6 month proving in period for each district to get used to the system and implement all of our standard operating procedures. So that continues to behave as expected.
So I think we'll be seeing the results of those investments as we proceed through 2020.
Okay. All right. Where do you think your margins would be in Q1 or Q2 Home Care margins? Would they be at the current level or would they be better than what you have, assuming no one time items?
Well, so a couple of things I'd say on that front, Yash. First, you're going to get the impact of the exit from BC. So we'll see a significant change in the margins as a result of that, and David's quantified that impact earlier. The other point to make here is that the back office investments that we need to handle the additional volumes have been made. So as volumes increase, we're going to hold the back office costs steady, and you'll see, therefore, the margins expanding in tandem as the volumes increase.
So it's really only our variable costs of delivering the service in the home that will be going up as our volumes go up because our back office investments have all been made and they've been trained on the new system. So we're ready to go.
Okay. On that point, I'm a bit confused. So you have installed this new state of the art machine or software, but you are requiring more staff or like am I missing something?
Well, yes, there is there are efficiency gains as a result of it, Yash, but nevertheless, we're looking at putting a staff in place to handle the underlying market growth, which is about 4% a year, plus closing the gap in terms of all of the referrals that we're receiving that we're not able to deliver today. So there's pretty significant volume increase that's required to meet that to meet those demands in the market. So that's why we still needed some investment in the back office.
So how many people are we talking about, like the incremental staff after having installed the machine this new software?
That's not a number that we've precisely shared with the market in the past, Yash. I mean, I think you can infer it from our cost structures. And I think you can infer it from what we think our ultimate margins will be when we return to historical margins.
Okay. Moving on to the LTC funding, the discussions. What have you been able to quantify the impact that you think these changes will make to your LTC NOI?
Sorry, quantify which impacts, Yash?
So both Alberta and Ontario governments are reviewing their funding models, right?
Right. Yes, they're both there's nothing concrete from either Alberta or Ontario on the funding models specifically. What I can say is what we think about 2020, as we indicated, I think in Q3, Alberta has frozen funding for AHS. So from an outlook for rate increases in Alberta, we don't expect anything in 2020. From a CARE funding perspective, there will be some modest accommodation increases most likely.
And in Ontario, nothing unusual at this point. They are expected for 2020. And the funding changes that they're looking at on the operating model, we don't really have anything concrete as to what they're contemplating on that front. And obviously, we've been working quite heavily with the ministry on the capital funding side on the redevelopment. But again, nothing concrete on that front.
Okay. And have you heard anything on the long term care redevelopment program? Like any changes, anything?
So Yash, we've got nothing new to report at this point. I will say that there's been a significant collaborative dialogue between the industry players, the Long Term Care Association and the Ontario government. It's been going on for quite a few months. So we're very confident that the government understands the challenges faced by the industry. So we're optimistic about the future of the redevelopment program, but we'll wait for further clarity before deciding how and when to proceed with our 21 seabed projects.
Okay. And just one more question. What kind of services is Amica using from the SGP division? Like, is it just bulk purchase or anything else they are using?
No, it's the bulk purchasing. That I mean, that's what SGP does. It's the assist side of the business that provides other contract services, but FGP is just purchasing.
Thank you. Our next question is from Chris Couprie from CIBC. Your line is open. Please go ahead. Morning.
Hi, Chris. Hi, Chris.
Hey. So last quarter, I asked if the rate of decline year over year impairment was going to improve sequentially and you said basically yes. So what happened, I guess, between the conference call and the end of the year?
Well, nothing happened. I mean, the Q4 volumes were about 0.3% higher than Q3. So on a sort of quarter over quarter basis, that quarter is always a little softer because of from a volume perspective because of the holidays. So we typically see a little softness. So we were happy to see a quarter over quarter increase despite the seasonal softness that's there.
So from our perspective, we're on track for the growth agenda we're trying to achieve.
And then with respect to the investment that you've made into the business, If I recall, you guys also made an investment Q4 of the prior year with that kind of objective that we're investing in anticipation of the volume growth. So what is this, I guess, this new investment And I guess what's changed?
Well, so we've been making those investments district by district as we go through across the business. So as we put in the new computer system, we are refactoring the staff in each office and setting it up for the volumes that we are targeting in the market. So it was just a matter of continuing that effort and applying it applying that model to the districts that we implemented in Q4.
Okay. So if I'm looking at this I'm just trying to see if I'm looking at this correctly in terms of the incremental investment made was like about $2,000,000 to $3,000,000 Does that sound about right?
Incremental, how are you getting that number, Chris?
Just looking at the change in normalized OpEx sequentially.
Yes. For a full year?
Quarter over quarter.
Yes. I don't I mean, it wouldn't be I'm not sure how you I don't think that would be
Yes,
maybe we can talk, we can take that offline. Okay. And so just in terms of the labor attrition rates, I know you were making some progress last year. How did how are things looking kind of as you end the year?
That's about the same, Chris. Like as I look at it from sort of Q3, Q4 has been fairly consistent. We still think there's some opportunities to improve it further, but Q4 wasn't really much different from Q3 in that regard.
Okay. I think that's it for me. Thanks.
Thanks, Chris. Thank you.
There are no further questions. I'd like to turn the meeting back over to Jillian Fountain.
Thank you, Kate. That concludes our call for today. This presentation is available on our website as are the call in numbers for an archived recording. Please don't hesitate to give us a call if you have any further questions. Thanks and have a good weekend.
Goodbye.
Thank you. The conference has now ended. Please disconnect your lines
at this time. Thank you for your participation.