All participants please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to Extendicare Inc.'s third 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, Retta. Thank you. Good morning, everybody. Welcome to Extendicare's 2019 third quarter results conference call. With me today is Extendicare's President and CEO, Michael Guerriere, and our CFO, David Bacon. Our 2019 third quarter 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 November 22nd. The replay numbers and passcodes have been provided in our press release. An archive recording of this call will also 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 have identified such factors in our public filings with the Securities Commission 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'd like to turn the call over to Michael.
Thank you, Jillian, and good morning, everyone. As you can see from our third quarter results, we are continuing to build and optimize Extendicare's business, positioning the company for sustainable long-term growth. In the third quarter of 2019, we recorded an increase in revenue, drove growth in our retirement living operations, and advanced the implementation of our ParaMed Transformation. Extendicare continues to enhance its operations to provide excellent care to the steadily growing number of Canadian seniors wherever they need it, as they age and their care needs evolve. Our growth is supported by a strong foundation in the market and continued investment in our people and technology.
During the quarter, we welcomed a significant new SGP client that brings 4,000 new beds into the partnership, and in the first week in October, we opened a new 124-suite retirement living community, in addition to delivering solid financial results from our long-term care and retirement operations. On slide three, as we've discussed previously, we're in the process of strengthening our ParaMed business by moving to a new cloud-based system, supported by standard operating procedures and training processes that will enhance our ability to meet the increasing demand for home health care services. This transformation will improve scheduling, automate work processes, and reduce turnover, and better support our valued staff. Our original estimate of a CAD 12 million investment for the transformation remains unchanged. We anticipate that the remaining costs associated with the completion of the transformation project will total approximately CAD 2.6 million, the majority of which will be incurred in 2019.
The system implementation remains on track, now with 76% of our targeted volumes now supported by the new platform. We expect to be near 90% complete by the end of this year. The project will complete in Q1 next year. We anticipate that once implemented, the new system, coupled with the ongoing training and optimization of our operations using the new platform, will drive volume increases as we enter 2020. Typically, our volumes drop about 2% in the third quarter compared to the second quarter due to seasonal trends. In the third quarter of this year, we experienced a volume decline of 1.4% compared to the second quarter of 2019, representing some growth mitigating the seasonal trend. We view this as the second consecutive quarter that our transformation efforts have had a positive impact on volumes.
The company continues to make progress with ParaMed's exit from the BC home health care market. Final dates for the transfer of the operations to the BC Health Authorities are still being finalized, but are expected to occur no later than the end of Q1 2020. Moving to our long-term care operations on the next slide. Long-term care funding enhancements helped drive an increase in revenue in Q3. As we announced last quarter, the Ontario government provided a funding increase for long-term care providers of 1%, effective April 1, 2019, which represents, for Extendicare, an increase in annual non-flow through revenue of approximately CAD 1 million. At the same time, the government indicated plans to eliminate the structural compliance premium funding for eligible beds effective October 1, 2019. However, the government has since deferred that decision until its next fiscal year, beginning April 1, 2020.
We currently receive annual structural compliance premium funding of CAD 1.3 million. As we noted last quarter for our Alberta operations, government funding changes that normally take effect April 1, 2019, continue to be delayed while Alberta Health Services assesses the impact of the recent Alberta government budget that included a four-year funding freeze for AHS. Extendicare, together with the Alberta Continuing Care Association, continues to be actively engaged in discussions with the Alberta government and AHS to revise the existing funding model used for long-term care. In the meantime, we did receive a 1.6% resident accommodation rate increase that took effect July 1st, 2019, representing approximately CAD 500,000 of additional revenue annually for Extendicare. On the Ontario long-term care redevelopment front, the government remains committed to adding 15,000 new long-term care beds and 15,000 redeveloped beds over the next five years.
Extendicare's projects are in various stages of planning and approvals, none are currently under construction. Management is working closely with the Ontario government and the industry association to advance the Building Program, including possible changes to the application and licensing process and the construction funding subsidy. We believe that the Ontario government is well aware of the critical state of long-term care and the pressing need for additional long-term care beds. The importance to the public and the impact this program will have on mitigating the hallway medicine problem faced by hospitals will keep this issue at the forefront of public policy agenda until the necessary changes are in place to get construction underway. Let's turn to retirement living on slide five. In the third quarter of 2019, we continued to drive growth from our retirement living operations, with rising occupancy trends across our stabilized and leased-up communities.
In 2019, we have added 236 new suites with the opening of new retirement communities in Bolton earlier this year and Barrie, Ontario, in October. Average occupancy of the stabilized retirement living communities increased to 94.6% for the nine months ended September 30th, 2019, compared to 90.5% for the same period last year. In our leased-up communities, we continued to experience sequential growth in occupancy to 78% as of September 30th, 2019, up from 72% on June 30th. In October, we opened and welcomed our first residents to the Barrie View, our new 124-suite retirement living community in Barrie, Ontario, offering 78 independent living suites, 23 assisted living suites, and 23 memory care suites. Pre-lease activity at the Barrie View is well ahead of schedule, with current occupancy at 38% and strong pre-sale deposits on hand.
As a result of this initial response, we are projecting stabilized occupancy of 95% by the end of 2020, ahead of our original expectations. We continue with expansion plans to almost double the size of our 63-bed Port Hope retirement community, which we hope to break ground on next spring. On slide six, Extendicare Assist contract services and SGP group purchasing services continued to be growth drivers for the company, increasing revenues by 7.4% year-to-date. Currently, we provide contract services to 53 long-term care centers and retirement living communities for third parties through Extendicare Assist. In the third quarter of 2019, Extendicare's SGP Purchasing Partner Network welcomed West Coast Seniors Housing Management, a service provider to over 4,000 residents in British Columbia, to our growing number of highly respected clients. Together with our partners, SGP now provides cost-effective products and services to more than 64,000 seniors residents across Canada.
We continue to develop opportunities to expand SGP and Assist through additional services and product offerings and by expanding the reach of our sales team into other geographies. I now turn to David Bacon, our Chief Financial Officer, to provide insight into our financial results from the third quarter.
Thanks, Michael. I'll first provide an overview of our corporate financial performance for the third quarter, and then I will get into some highlights of our individual business segments. Turning first to slide eight, Extendicare increased revenue by 0.9% to CAD 282.7 million in the third quarter from Q3 of 2018, largely driven by long-term care funding enhancements and growth in the retirement segment. Net operating income declined by CAD 600,000, or 1.8%, to CAD 34.9 million in the third quarter and represented an NOI margin of 12.3% compared to 12.7% in Q3 of 2018, reflecting the revenue improvements offset by lower home health care volumes and increased back-office operating cost impairment. Adjusted EBITDA declined by CAD 800,000 to CAD 23.6 million in Q3 of 2019 and represented an adjusted EBITDA margin of 8.3% compared to 8.2% for the prior year, reflecting the decline in NOI and higher administrative costs.
For the three months ended September 30th, 2019, AFFO improved by CAD 300,000 to CAD 13.7 million compared to the same prior year period, primarily driven by lower maintenance CapEx in the third quarter of 2019 compared to the prior year. Our dividend remains an important way to return value to our shareholders, and in the first nine months of 2019, the company declared dividends of CAD 32 million, representing a payout ratio of 78% compared to the 70% for the same period last year. Turning now to slide nine. I'd like to highlight items that impacted the comparability of our third quarter and year-to-date results similarly to how we presented these items in the second quarter. We continue to track our spending on the ParaMed Transformation project, and our cost estimates remain in line with our original forecast of CAD 12 million.
For the third quarter, the net impact of the ParaMed Transformation costs reduced adjusted EBITDA by CAD 100,000. In the third quarter of 2019, we incurred CAD 1.1 million in severance costs related to changes in leadership in some of our head office support functions as compared to the net severance costs incurred in Q3 of 2018 of CAD 1.7 million related to the departure of our former CEO. The net impact of the change in severance costs increased adjusted EBITDA by CAD 600,000. The ongoing impact of the implementation of IFRS 16 reduced administrative costs by CAD 700,000, increasing our adjusted EBITDA over Q3 of 2018. Recalling, though, that this is offset by an increase in depreciation and interest expense.
Turning now to slide 10, you will note that there was no impact on revenue as a result of these items in the current quarter, and the impact on the change in NOI and adjusted EBITDA in Q3 2019 compared to the prior year is CAD 400,000 and CAD 1.2 million, respectively. In addition, adjusting for these factors impacting comparability for the third quarter of 2019, our payout ratio would be 73% as compared to the 78% as reported. Turning now to our individual business segments and first to our home health care operations on slide 11. Adjusting for the factors impacting comparability I just mentioned, NOI from our home health care operations was CAD 8.6 million for Q3 of 2019, representing a decrease of CAD 1.2 million from CAD 9.8 million for the prior year period, largely driven by lower volumes in the current quarter.
The NOI margin was 8.2% for the quarter, compared to 9.2% in the third quarter of 2018, as lower volumes and increased costs associated with added support staff lower our profitability. Volumes from our home health care operations for this quarter declined by 1.4% over the three months ended June 30th, 2019. As Michael mentioned, a decline in volume is typical during the summer months. However, this quarter's sequential decline at 1.4% was below the 2% comparable decline we've experienced in both the third quarters of 2018 and 2017. As we've previously indicated, we continue to work towards exiting the low-margin BC market in the first quarter of 2020. In the third quarter, BC contributed CAD 13.1 million of revenue and break-even net operating income, which was bolstered in the quarter by retroactive funding received towards increased benefits costs.
For the nine months ended September 30th, 2019, BC contributed CAD 37.3 million of revenue and a net operating loss of CAD 500,000. Our NOI margins in Q3 of 2019, excluding BC, would have been 9.3%. Turning now to our long-term care operations on slide 12. In the third quarter, revenue grew by CAD 1.7 million or 1.1%, and our NOI increased by CAD 500,000 or 2.2% from the same prior year period with an NOI margin of 12.8%, up slightly from 12.7% in the third quarter last year. Funding enhancements, the timing of envelope spending, and lower utility costs in the third quarter compared to the same period in the prior year contributed to the increase in NOI. Turning to slide 13. The NOI from our retirement living operations increased CAD 200,000 or 8% to CAD 2.9 million in the third quarter as compared to Q3 2018.
This improvement was driven primarily by the growth in average occupancy from same store operations to 94.7% for the three months ended September 2019, compared with 86.8% for the same period in the prior year. This increase was partially offset by a decline in the contribution from our non-same store operations of CAD 500,000 due to pre-opening and early lease-up losses from our new communities in Bolton and Barrie, and a decrease in the number of townhome resales at our Lynde Creek Village facility and higher labor costs due to personnel changes in the current quarter. Looking at our final business segment on slide 14, NOI from the contract services, consulting, and group purchasing operations declined by CAD 500,000 to CAD 3.2 million in the third quarter compared to Q3 2018.
The drop in NOI was primarily related to the increase in back-office staff added to support the growth and the timing of non-recurring revenue compared to the third quarter of 2018.Finally, turning to Slide 15 and our financial position. The company's consolidated cash and short-term investments on hand were CAD 96.8 million as of September 30th, 2019, representing an increase of CAD 30.9 million from the beginning of the year. In addition, the company has CAD 65 million available to draw under its ParaMed credit facility, and subsequent to the end of the quarter, we repatriated a further $10 million of cash from our captive for general corporate use. The company's reported long-term debt, including convertible debentures as of September 30th, 2019, was CAD 558.9 million.
The increase in long-term debt of approximately CAD 29 million from year-end remains relatively unchanged from the levels reported in Q2 and reflects the impact of the adoption of IFRS 16, the renewal of our head office lease in Q2, a new mortgage on a retirement community, and draws on our construction loan offset by debt repayments. With that overview, I'll pass it back to Michael for his closing remarks.
Thanks, David. This quarter, we have continued to make investments in our business to drive sustainable growth and profitability. We are pleased with the progress we have made on this front. Extendicare offers a unique breadth of services across the continuum of care to meet the rising demand of Canadians who seek the best possible care for themselves and their loved ones. Demand in the seniors care market increases at 4% annually due to demographic growth. We are investing in the people, systems, and processes necessary to position Extendicare to meet that opportunity. Thanks to the dedication of our team of 23,000 caring employees, we are helping thousands of Canadians to live better every day. With that, we'll be happy to take any questions you may have. Retta?
Thank you. We will now take questions from the telephone lines. If you're using a speakerphone, please mute your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while participants register for questions. Thank you for your patience. The first question is from Lauren Collmore of TD Securities. Please proceed. Your line is open.
Thank you, and good morning.
Morning.
Just a little bit of a nit on the ERP implementation. It looked like you guys pushed out a little bit the conclusion. I was just wondering if you guys could maybe give a little bit of color on what was behind that.
Yeah, I think it is a little bit slower than we anticipated when we started a couple of years ago. It's bleeding a little bit into the new year. We're confident we'll be finished in Q1. The main issue is really when we get outside of Ontario, some of the work processes are a bit different. We're taking care to make sure that the system is able to manage that. It's a minor delay. Hasn't increased the cost. It's just stretched out the timing of getting it done.
Okay. I know, initially, I think the margins for this business were up around 12%. Obviously, they've come down quite a bit. I was wondering, where do you guys see them settling in once all this is said and done?
I think we're going to get back to our historical margins. As we've talked about, added quite a bit in the back office through this transition, to be able to start driving volume growth. We're starting to see just the earliest indications of that in the last couple of quarters, but we think that we'll start to see that in a significant way in 2020. The volume growth, I think, will come before the margin improvements. I think the margin improvements will come in the later quarters of 2020. We'll continue to improve into 2021. At this point, we see no reason why we can't get back to our historical margins.
Okay. Just on the captive, you guys repatriated the $10 million. I guess the U.S. sale now has been four or five years ago. When does that sort of wind down?
The fifth anniversary would be June of 2020 of that. We're getting very much near the tail end of that. We took out the $10 million this year. Next year at a minimum, we'll probably take out another US$5 million. Given the strong progress we've seen, in terms of the wind down, we are going to seek to look for some opportunities to maybe expedite the unwinding. If left as it is, probably could still go into 2022, 2023, but with very, very little activity. Given where we're at, we may look to expedite that in 2020.
Okay. Just lastly from me, when do you guys, and I know this may be tough to answer, but when do you guys think you could start getting some approvals and making some progress on the LTC developments?
Yeah. It's an ongoing exercise for us. As I mentioned in the opening remarks, the government is committed to adding these additional beds. But despite their policy commitment, the amendments that have been made to the construction funding subsidies earlier this year are not enough to make the economics for these projects work. We've already received some approvals on a couple of our homes, but we're going to wait until the economics are more favorable before proceeding on those projects. All of our projects are in various stages of planning and approvals. As I said earlier, none of them are currently under construction. We're in active conversations with the government. We're working closely with the Ontario Long-Term Care Association to get the necessary changes to the program to get that moving forward.
As I said in the remarks earlier, there's no question that the public hospitals are feeling the pressure of the lack of supply on the long-term care front. We're quite confident in the coming months that this will be sorted out.
Just a quick follow-up. Is there any sort of event you guys are waiting on or anything particular that needs to transpire to kind of, maybe there's like a one-off event that would kind of push things in the right direction? Is there a whole lot of different things in play here?
I think the government has to make some decisions. You may recall that the government, in the reorganization that occurred over the summer, separated the long-term care side of health from the Ministry of Health and created a separate Ministry of Long-Term Care. There's a new minister, there's a new deputy minister. We've met with them. They've only been in place for a few months. I think that event was important in setting up the appropriate departments to be able to shepherd this along, and I think signals the government's seriousness with moving it ahead. As to when some of those decisions will come down, we're not clear on that. I expect it'll be in the next couple of quarters, but that's just a guess on my part.
Okay. That was actually really helpful, color. Thanks so much. I'll turn it back.
Thank you. The next question is from Chris Couprie of CIBC. Please proceed.
Good morning, or almost good afternoon.
Good morning.
Just wanted to go flesh out ParaMed a little bit more. If you look at the sequential decline by geography, is there any color you can provide there?
Yeah. It's quite different district to district. We have 18 different districts that run as essentially divisions of the business, and they're at varying stages of implementation and optimization around the project. What we're finding is that it takes about six months for a district to fully absorb the benefits of changing the systems out and to start getting growth. We still have the challenges on the labor front to get the people that we need in place to deliver the services. Some of our offices are fully staffed, and others are still recruiting to get to that full staff complement. That's another factor in delaying the impact of the new system going in. Fortunately, we've seen a marked drop in our attrition.
Over the last 12 to 18 months, we're about a third of the attrition we were at the beginning of 2018. That's really helping us to start to build our teams up to take advantage of the software. It is variable. Certainly the offices that are earliest in the implementation, we're seeing some very robust growth. That's offset by some of the other offices that are still in the implementation process. We're seeing the early indications from the perspective of the entire business at this point, and I think that'll gain momentum in future quarters.
I think you said you're 76% complete the ParaMed Transformation. I'm going to assume that's pretty much all Ontario. Can you comment at all on the year-over-year decline in Ontario this quarter versus the prior quarters? It doesn't look like there's been very much year-over-year improvement in that province. I'm assuming that's where most of the implementation has taken place.
Yeah, we had some pretty significant declines occurring quarter-over-quarter in 2018 still. We're still working through that now. I think the thing that we're looking at is the trend from Q1 to Q2 to Q3. I think you'll continue to see that going into the future, that we're going to have an increase in growth profile as these offices get up to speed.
What's the critical item to get the volume to recover? Is it staff or is it Just what's the critical path right now?
There is a couple of factors that are really important in driving the volume. One, of course, is having the staff, but the other is to fully utilize the staff you have with optimized scheduling. We are moving from a largely manual scheduling process to an optimized scheduling process where the software is guiding the optimization of the scheduling. It is that combination of things that is important. I referred to the attrition earlier. One of the problems that was there is that if you hire somebody but don't use all of their hours, it means that they are not getting full-time hours, which of course makes it hard to put food on the table. That was driving some of the attrition, because the scheduling was not optimized. People were not staying with the organization.
I think we've turned that around, where we're able to fully utilize the hours of the staff that we have, which means that when we hire people, they're staying, and starting to drive some of the growth. It's the relationship between that scheduling function and the recruiting that has to be in good balance in order to make sure the growth is sustainable.
Based on what you're seeing kind of quarter to date, would you kind of suggest that the rate of decline year-over-year should improve sequentially?
Absolutely.
Okay. With respect to the margin, on a trailing 12-month basis, if you exclude BC, you have done about 9.4 million hours. Margin looks like it was 9.1%, 9.2%. If you get to 10 million hours, what does the margin look like? Maybe if you can give us a hand on translating volume growth into margin expansion.
I think, Chris, as you said, I think if you exclude BC this quarter, we're at 9.3% on an average basis. I think going forward at CAD 10 million, I think if you think about out to next year, as Michael said, the volume will come first and the margin improvements will follow after that. I think, as Mike said, we will return back to those historical levels. I think trying to predict exactly when that will happen, I think we're confident when we have the optimization and we're really leveraging the platform, we can turn our minds to the efficiency of that back office function.
Hard to say exactly when that looks like and when we do hit 10 million hours, it's difficult to say where we will exactly be on that spectrum between sort of a 9.3% coming out of this quarter, over the course of next year. Those historical margin levels of that sort of 12% range are achievable. It's just hard to say exactly when that will start to turn. We do feel like it's going to start progressing in the latter half of next year as we really optimize the scheduling capacity.
What is it that gives you that confidence heading into next year? At a certain volume level, you must have some idea of where margins could be. Am I not right, or?
Yeah. Chris, you are. I think the thing that gives us confidence is the fact that we deliberately added significant back office staff in order to turn us back to a growth trajectory. Those back office staff are largely in place. We'll be able to increase our volumes without having to increase the back office very much. From this point forward, any volume increases are going to result in an increase in the variable cost of sales, it's not going to increase the back office staff component of this. That's why we'll see volume increases, you'll start to see the margin improving because we're not adding to the cost in the back office.
To David's point, I think we'll be able to actually reduce back-office costs in addition to that, but we're not going to do that until we're on a growth path that is sustainable and predictable. As I mentioned in the opening remarks, the underlying market is growing at about 4%. We've also left some significant market share on the table over the last couple of years. We're really looking for a growth in the 4%-6% range. That's what we're shooting for. That's our priority at this point. Then as we're getting into those types of growth rates, we'll be looking to spend more of our energy on optimizing the back-office costs.
I'm going to try asking this one last way. What do you think the contribution margin is from an incremental dollar of revenue?
It's in that 24, 25. It's about that 24% range today.
Okay, thanks. All right, I'll get back in line. Thank you, guys.
Thank you. Once again, please press star one on your telephone keypad if you have a question. The next question is from Yash Sankpal of the Laurentian Bank. Please proceed.
Good afternoon.
Hi, Yash.
Just want to focus on the home health care division. If I plot that, what I see is that number moved up significantly in 2017 and middle of 2018. Then after that, it suddenly started dropping, and it has gone. Now, I think it's the lowest level ever. I'm trying to understand how much of that is because of staff issues and how much of that is because of scheduling issues.
Sorry, Yash, we missed that last point. How much of it is staff and how much of it is what?
Scheduling. You said that some of your offices still do manual scheduling, and you're trying to optimize that using the software.
Right.
Installing.
Right.
If you were doing manually before, your volumes were still like per average hours delivered per day were still going up.
A couple of things, Yash, were instrumental in the issues that we've seen. Really, as we got through 2015, 2016, 2017, the labor market significantly tightened up. If you remember, there was also some changes in minimum wage legislation in Ontario in particular. The result was that the labor market tightened up quite a bit, and we started to see significant increases in attrition that we hadn't seen prior to that. Where we were able to get away with giving somebody 30 hours a week or 35 hours a week, as people had other alternatives in the labor market, they were leaving for better opportunities. Today, people are looking for a reliable 40 hours a week, and in order to do that, you have to have quite optimized scheduling.
In order for us to regain back to being able to take advantage of the volumes, we have to move to these modernized systems to be able to enable that. Those were the big sort of external environmental factors that caused us a problem. You may recall that a lot of the other home health care providers in the Canadian market are already on the system that we're implementing. We got a little bit behind the curve by not moving to that cloud-based platform, where others in the market did. That's why we had more difficulty adapting to the tighter labor market than perhaps others did.
Okay. Based on what you're seeing right now, the system implementation and everything, where do you think your home care volumes would be in 2020?
Well, as I said, our target is to get to a growth rate that is in excess of the underlying market. We're looking at wanting to be north of the 4% per year that the underlying market is growing. That's what we're shooting for. I have a number of districts that are already growing in excess of that rate. It's a matter of how long it'll take us to get all of our offices optimized. A little bit hard to predict the exact timing of that. I think we'll get the whole business to that level of growth. Exactly how many quarters it'll take us to get to that point, we're still actively working to get that implementation completed to achieve that.
If you extrapolate from our observation that it takes about six months to optimize an office after implementation, you can start to get a sense of when we should see all of our offices operating at that level of efficiency.
Okay, how do you define a district as, or when do you call a district optimized? What do you look at? Do you look at number of hours of services provided per day?
The first thing that we're optimizing for is getting the growth back to be in excess of the market, so 4% growth rate annually. Then, as David said earlier, we'll focus on the back office efficiency to get the margins back to historical levels. It's a 2-stage process.
Okay, just one last question. You had some severance costs in the quarter. Just wondering what changed, and should we expect any more costs in Q4?
We made some leadership changes, particularly in our corporate functions. They were not necessarily planned, so we don't have anything planned for Q4. That's not to say that there won't be anything there. We're continuing to drive to higher levels of performance, and we'll make changes accordingly to make sure that we're meeting our objectives.
Okay. Sorry, just one more. What would be the NOI contribution of the new SGP contract?
Well, I think that if you sort of did a revenue per bed type calculation, that contract's going to be in line with our others. You're going to be looking at revenues in the CAD 400,000, CAD 500,000 range, and the margins will be comparable to what you see in the group.
4,000? Sorry, you said
CAD 400-CAD 500 a year on revenue, and the margins on that would be comparable to the margins that we have on the business.
Got it. Okay. Thank you. That's it for me.
Thank you. The next question is from Tal Woolley of National Bank Financial. Please proceed.
Hi. Good morning.
Hi, Tal.
Morning, Tal.
I just wanted to go back to one of your earlier comments. You mentioned that you had a redevelopment project approved, but you're not proceeding at the time. Do I have that correct?
Yes.
Okay. I'm just trying to understand a little bit more about how the process works. I would've thought if you had an approval, so you've said no prior to a development agreement being signed, or has one been signed already?
In this case, we have a development agreement signed.
Okay. You're able, even at this point then, to wait and redraw the terms? I just would've thought once the province signed a development agreement with you, they would've expected you to proceed. I'm just trying to understand how you can manage these things going forward, too, because you're going to have a lot of them to do.
Yeah. Well, the construction funding subsidy at the time of construction is what determines that subsidy for the 25-year period after the home opens.
If that CFS is not at a point that the project is viable economically, then we're not going to proceed. When we talk about very disciplined evaluation of the long-term care redevelopment projects, that's what we mean, is that the economic conditions have to be right. We thought that that project was viable at that particular stage. When we took the project to tender, we found that the costs had escalated so much that the project just didn't work anymore. We're essentially back to the drawing board in terms of the financials before we can proceed.
Again, just back to your earlier comments, you're saying you think that the subsidy question could be addressed within the next couple of quarters?
Yes.
I appreciate you said that that was a guess, though, too.
Yes, it's a guess, but the fact is, there's very, very limited construction happening in the long-term care sector anywhere in the province of Ontario.
Given the urgency of needing supply on the long-term care front, we don't think that that can be sustained for any length of time. That's the basis for my prediction that we'll see some changes.
Okay. That's helpful. Just in the other segment, you had made reference to some increase in support costs in that segment this quarter. I'm just wondering, was that sort of like a one-time investment, or was this like you're stepping up labor, and we should see an ongoing investment in cost going forward?
No. Tal, it's David here. The increase is really a year-over-year. We added those resources partly last half of sort of 2018 are really the big build up on the back office costs there on SGP Assist. It's really just coming through this quarter on a year-over-year. They came in towards the back end of last year.
Okay. You'll start to annualize that impact.
Yes
towards the end of this year?
Yes.
Okay, perfect. Thank you very much, gentlemen.
Thanks.
Thank you. The next question is from Pammi Bir of RBC Capital Markets. Please proceed.
Thanks, and good afternoon. Just on ParaMed, and I don't want to belabor it because we've obviously covered it a fair amount on the call, but what is normal industry sort of staff turnover in this business and how does that compare to what ParaMed is seeing at this stage?
It's hard to say what normal is because I think it depends on the underlying conditions in the labor market. It's also very different in different geographies across the province. Rural situations are very different from urban ones. There's a lot of local kind of variability in conditions. Typically in this type of a business, you'd expect the turnover to be around 20% a year. It's still a significant turnover in this space. Just as a comparison, our long-term care turnover is closer to 15% a year. This tends to be a little bit higher than that. Last year for most of 2018, we were seeing turnover rates in the 30% range. Right now it's variable, but we have some offices that are running below 20% and we still have some offices that are closer to 30%.
It's variable just depending on the geography and their stage in the scheduling optimization.
That's very helpful. I guess, maybe just as an extension, once you're fully implemented across your districts, what would sort of be your target? What would you aim to achieve or perhaps would be a realistic expectation once it's all said and done in terms of the turnover?
I'd be happy with anything less than 20%.
Okay. Thanks very much. That's all for me.
Thanks.
Thank you. Once again, please press star one on your telephone keypad if you have a question. We do have a follow-up question from Chris Couprie of CIBC. Please proceed, sir.
Hi, guys. Just a quick one from me. Your cash on the balance sheet continues to grow. You've got the repatriation coming in. Any update in terms of some of the strategic things you guys are thinking about? I know you referenced, I think it was the last quarter, about looking at other verticals for SGP. Just any color there?
Yeah, I would say at this point, Chris, that our view is that until we have some visibility on the timing of the long-term care redevelopment, we're keeping our powder dry and being a little bit conservative on that front. I think I'd like to see, and because I do think we're going to see something by first or second quarter of 2020 in terms of an indication of where government policy is headed on this, we're going to wait until we understand that before making any real decisions about the use of cash.
Thanks.
Thank you. There are no further question registered at this time. I'd like to return the meeting back over to Ms. Fountain . Please proceed.
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